UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the year ended December 31, 20172019
or
For the transition period from _____ to _____
Commission file number 001-36353
Perrigo Company plc
(Exact name of registrant as specified in its charter)
| Ireland | N/A | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
The Sharp Building,Hogan Place,Dublin 2,IrelandD02 TY74
+35317094000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Ordinary shares, €0.001 par value | PRGO | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | |||||
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. | |||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |||||
| Indicate by check mark whether the registrant has submitted electronically | |||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. . | |||||
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||||||
| Emerging growth company | ||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | |||||
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of our ordinary shares on June 30, 201728, 2019 as reported on the New York Stock Exchange, was $10,768,787,616.$6,477,490,316. Ordinary shares held by each director or executive officer have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 23, 2018,21, 2020, the registrant had 140,833,598136,126,977 outstanding ordinary shares.
Documents incorporated by reference:
The information called for by Part III will be incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be filed pursuant to Regulation 14A or will be included in an amendment to this Form 10-K.
PERRIGO COMPANY PLC
FORM 10-K
YEAR ENDED DECEMBER 31, 20172019
TABLE OF CONTENTS
| Page No. | ||
| Part I. | ||
| Item 1. | ||
| Item 1A. | ||
| Item 1B. | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| Additional Item. | ||
| Part II. | ||
| Item 5. | ||
| Item 6. | ||
| Item 7. | ||
| Item 7A. | ||
| Item 8. | ||
| Item 9. | ||
| Item 9A. | ||
| Item 9B. | ||
| Part III. | ||
| Item 10. | ||
| Item 11. | ||
| Item 12. | ||
| Item 13. | ||
| Item 14. | ||
| Part IV. | ||
| Item 15. | ||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” "forecast," “predict,” “potential” or the negative of those terms or other comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control, including: the timing, amount and cost of any share repurchases; future impairment charges; the success of management transition; customer acceptance of new products; competition from other industry participants, some of whom have greater marketing resources or larger market shares in certain product categories than we do; pricing pressures from customers and consumers; resolution of uncertain tax positions, including the Company's appeal of the Notice of Assessment ("NoA") issued by the Irish Office of the Revenue Commissioners (“Irish Revenue”) and the draft and final Notices of Proposed Adjustment ("NOPAs") issued by the U.S. Internal Revenue Service and the impact that an adverse result in any such proceeding could have on operating results, cash flows and liquidity; potential third-party claims and litigation, including litigation relating to our restatement of previously-filed financial information;information and litigation relating to uncertain tax positions, including the NoA and NOPAs; potential impacts of ongoing or future government investigations and regulatory initiatives; resolutionpotential costs and reputational impact of uncertain tax positions;product recalls and sales halts; the impact of U.S. tax reform legislation and healthcare policy; general economic conditions; fluctuations in currency exchange rates and interest rates; the consummation of announced acquisitions or dispositions and the success of such transactions, and our ability to realize the desired benefits thereof; and our ability to execute and achieve the desired benefits of announced cost-reduction efforts, and strategic and other initiatives. In addition, we may be unableAn adverse result with respect to remediate oneour appeal of any material outstanding tax assessments or more previously identified material weaknesses inlitigation, including securities or drug pricing matters, could ultimately require the use of corporate assets to pay such assessments, damages from third-party claims, and related interest and/or penalties, and any such use of corporate assets would limit the assets available for other corporate purposes. Statements regarding the separation of the RX business, including the expected benefits, anticipated timing, form of any such separation and whether the separation ultimately occurs, are all subject to various risks and uncertainties, including future financial and operating results, our internal control over financial reporting.ability to separate the business, the effect of existing interdependencies with our manufacturing and shared service operations, and the tax consequences of the planned separation to us or our shareholders. Furthermore, we may incur additional tax liabilities in respect of 2016 and prior years or be found to have breached certain provisions of Irish company law in connection with our restatement of our previously filed financial statements, which may result in additional expenses and penalties.These and other important factors, including those discussed in this report under “Risk Factors” and in any subsequent filings with the United States Securities and Exchange Commission, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
This report contains trademarks, trade names and service marks that are the property of Perrigo Company plc, as well as, for informational purposes, trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, certain trademarks, trade names, and service marks referred to in this report appear without the ®, ™ and SM symbols, but those references are not intended to indicate that we or the applicable owner, as the case may be, will not assert, to the fullest extent under applicable law, our or their rights to such trademarks, trade names, and service marks.
Perrigo Company plc - Item 1
Business Overview
PART I.
| ITEM 1. | BUSINESS |
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013. We became the successor registrant to Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo", the "Company", "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
WHO WE ARE
We are a leading global healthcare company, delivering valuededicated to our customers and consumersmaking lives better by providing bringing “Quality, Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business modelSelf-Care Products™” that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe weconsumers trust everywhere they are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market.sold. We are a leading provider of branded OTC products throughout Europe,over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and gels, as well as nasal sprays and injection ("extended topical") prescription drugs.sprays. We are headquartered in Ireland and sell our products primarily in North America and Europe as well as in other markets including Australia, Israelaround the world.
Our vision is designed to support our shifting focus to our consumer branded and China.store brand portfolio and our global reach and the opportunities for growth we see ahead of us, while remaining loyal to our heritage. Our vision represents an evolution from healthcare to self-care, which takes advantage of a massive global trend and opens up a large number of adjacent growth opportunities. We define self-care as not just treating disease or helping individuals feel better after taking a product, but also maintaining and enhancing their overall health and wellness. In 2019, Perrigo’s management and Board of Directors launched a three-year strategy to transform the Company into a consumer self-care leader, consistent with our vision. Significant progress was made in the first year of our transformation journey towards achieving the major components of management’s transformation strategy, which consists of: reconfiguring the portfolio, delivering on base plans, creating repeatable platforms for growth, driving organizational effectiveness and capabilities, increasing productivity, allocating capital and delivering consistent and sustainable results in line with consumer-packaged goods peers.
Perrigo Company plc - Item 1
Business Overview
Segments
Segment Reporting Change
During the three months ended March 30, 2019, we changed the composition of our operating and reporting segments. We moved our pharmaceuticals and diagnostic businesses in Israel from the Consumer Self-Care International segment to the Prescription Pharmaceuticals segment and we made certain adjustments to our allocations between segments. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company.
Our new reporting and operating segments are as follows:
| • | Consumer Self-Care Americas ("CSCA"), formerly Consumer Healthcare Americas, comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
| • | Consumer Self-Care International ("CSCI"),formerly Consumer Healthcare International, comprises our branded consumer self-care business primarily in Europe and Australia, our consumer-focused business in the United Kingdom and parts of Asia, and our liquid licensed products business in the United Kingdom. |
| • | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S. and our pharmaceuticals and diagnostic businesses in Israel, which were previously in our CSCI segment. |
We alsopreviously had two legacy operating segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and Active Pharmaceuticals businessactive pharmaceutical ingredient ("API") businesses, respectively, which we divested (refer to Item 8. Note 2 and Note 6).divested. Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were moved to unallocated expenses. Financial information related to our business segments and geographic locations can be found in Item 8. Note 1920. Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.
Ranir Global Holdings, LLC Acquisition
On March 30, 2015,July 1, 2019, we acquired Omega Pharma Invest N.V. ("Omega"), one100% of the largest OTC companiesoutstanding equity interest in Europe, for $3.0 billionRanir Global Holdings, LLC ("Ranir"), a privately-held company. After post-closing adjustments, the total cash consideration paid was $747.7 million, net of $11.5 million cash acquired.
Ranir is headquartered in equityGrand Rapids, Michigan, and cashis a leading global supplier of private label and assumed debt of $1.6 billion, forbranded oral self-care products. This transaction advances our transformation to a total purchase price of $4.6 billion. The Omega acquisition expandedconsumer-focused, self-care company while enhancing our OTC leadership position into continental Europe, acceleratedas a global leader in consumer self-care solutions. Ranir operations will be reported in our international expansionCSCA and geographic diversification through enhanced scale and a broader footprint, and diversified our net sales and cash flow streams.
Planned RX Separation
We previously announced a plan to separate our RX business, which, when completed, will enable us to focus on expanding our consumer-focused businesses. In 2019, we continued preparations related to our planned separation, which may include a possible sale, spin-off, merger or other form of separation. While we remain committed to transforming to a consumer-focused business, we have not committed to a specific date or form for the separation. In connection with the proposed separation, we have incurred significant preparation costs and will continue to incur costs that, when completed, will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on the timing and final structure of the transaction.
Internal Revenue Service Notice of Proposed Adjustments
On August 22, 2019, we received a draft NOPA from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo
Perrigo Company plc - Item 1
Business Overview
Company plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms'-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena’s in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources.
Irish Tax Appeals Commission Notice of Amended Assessment
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before the Tax Appeals Commission. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources.
Perrigo Company plc - Item 1
Business Overview
API Divestitures
During the year ended December 31, 2016,2017, we identified impairment indicators associated with certain intangible assets and goodwill, which required us to test these assets for impairment. As a result, we recorded total impairments of $2.0 billion (refer to Item 8. Note 3).
During the impairment and fair value adjustments, respectively). On March 27,year ended December 31, 2017, we announcedcompleted the completed divestmentsale of our Israel API business to SK Capital, for a sale price of $110.0 million.
Financial Asset
During the year ended December 31, 2017, we divested the Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in upfront cash and up to $250.0 million and $400.0 million in royalties earned ifmilestone payments. We received the $250.0 million royalty payment on February 22, 2019. In order for us to receive the milestone payment related to 2020 of $400.0 million, the payments received by Royalty Pharma from Biogen for Tysabri® sales in 2020 must exceed $351.0 million. The 2018 Royalty Pharma payments from Biogen for Tysabri® were$337.5 million.
We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. Upon Tysabri® meeting the 2018 global net sales of Tysabri® meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction,threshold we transferred the entire financial asset to Royalty Pharma and recorded a $17.1$170.1 million gain duringin Change in financial assets. The fair value of the three months ended April 1, 2017 (refermilestone payment related to Item 8. Note 6 for additional information on the Royalty Pharma contingent milestone payments).
NEW PRODUCTS
We consider a product to be new if it (i) was (i) reformulated, (ii) involvedwas a product line extension due to changes in characteristics such as strength, flavor, or color, (iii) involvedhad a change in product status from "prescription only" ("Rx") to OTC, (iv) was a new genericstore brand or branded launch, (v) was provided in a new dosage form or (vi) was sold to a new geographic area with different regulatory authorities, in all cases, within 12 months prior to the end of the period for which net sales are being measured. During the year ended December 31, 2017,2019, new product sales were $209.7$230.5 million.
CONSUMER HEALTHCARESELF-CARE AMERICAS
Overview
The CHCACSCA segment is focused primarily on the sale of OTC store brand, self-care products in categories including cough, cold, allergyupper respiratory, pain and sinus, analgesic, gastrointestinal, smoking cessation, infant formulasleep-aids, digestive health, nutrition, vitamins, minerals and food, animal health,supplements, healthy lifestyle, skincare and diagnostic productspersonal hygiene, and oral self-care in the U.S., Mexico, Canada, and Canada.South America. We are a leading provider of consumer healthcareself-care products sold to consumers via store brands and also sell consumer healthcare products under our own brands. Consumer awareness and knowledge of the quality and value that OTC store brand products represent continues to grow due to retailer efforts made by store brand customers, retailers, and wholesalers to promote their own label programs. We also provide consumer self-care products under our own brands. During the year ended December 31, 2017,2019, our CHCACSCA segment represented approximately 49%51% of consolidated net sales.
The CHCACSCA segment develops, manufactures, and markets store brand, self-care products that are comparable in quality and effectiveness to national brands. Store brand products must meet the same U.S. Food and Drug Administration ("FDA") requirements as national brands within the U.S. and the requirements of comparable regulatory bodies outside the U.S. In most instances our product packaging is designed to invite and reinforce comparison to national brand products, while communicating store brand value to consumers.
The cost of store brand products to retailers is significantly lower than that of comparable nationally advertised brand-namebrand name products. Generally, retailers’ dollar profit per unit of store brand product is greater than the dollar profit per unit of the comparable national brand product. The retailer, therefore, can price a store brand product below the competing national brand product and realize a greater profit margin. The consumer benefits by
Perrigo Company plc - Item 1
CSCA
receiving a high qualityhigh-quality product at a price below the comparable national brand product. As a result, our business model results in consumers saving money on their healthcare spending.self-care needs.
We are dedicated to continuing to be the leader in developing and marketing new OTC store brand products including infant formula, and have a research and development ("R&D") staff that we believe is one of the most experienced in the industry at developing products comparable in formulation and quality to national brand products. In order to offer consumers product features or benefits that national brand companies do not offer, we have recently implemented a product development strategy to differentiate store brand products from national brands. Our R&D team also responds to changes in existing national brand products by reformulating existing products. For example, in the OTC pharmaceutical market, certain new products are the result of changes in product status from Rx to OTC. These “Rx-to-OTC switches” require FDA approval through a process initiated by the drug innovator. The drug innovator usually begins the process by filing a New Drug Application ("NDA"), which is often followed by a competitor filing an ANDA.Abbreviated New Drug Application ("ANDA"). New drugs are also marketed through the FDA's OTC monograph process, which allows for the production ofus to produce drugs that are generally recognized as safe and effective without pre-marketing approval.
The CSCA segment also develops, manufactures, and distributes certain branded products, which are consistent with the segment's self-care strategy. Branded products sold under brand names include Prevacid®24HR,Good Sense®, Zephrex D®, ScarAway®, Plackers®, and Rembrandt®.
We manufacture a significant portion of our CSCA segment's products at our plants located in the U.S., Mexico, China, and Israel, and we source the remaining product materials from third parties. In addition, in order to maximize both our capacity and sales of proprietary formulas, we engage in contract manufacturing, which involves producing unique ANDAs and monographproducts through partnerships with major pharmaceutical and direct-to-consumer companies.
We believe the increasing age of the global population, continued rising healthcare costs, and consumers who proactively prevent or treat conditions will drive the need for the greaterenhanced value that our store brand products provide to consumers. In addition, we believe that new products and products switching from Rx to OTC status (as described above) will continue to drive growth within the segment.
Recent Developments
On February 20, 2020, we entered into a definitive agreement to acquire the oral care assets of High Ridge Brands for cash of $113.0 million. The transaction is expected to close in the first quarter of 2020 subject to bankruptcy court approval in connection with High Ridge Brands’ Chapter 11 cases, as well as other customary closing conditions. This transaction, in combination with our existing children’s oral self-care portfolio, provides a new platform for disruptive product innovation in the form of exclusive store and value brand programs that challenge current national brand oral care offerings.
| • | On January 3, 2020, we acquired Steripod®, a leading toothbrush accessory brand and innovator in the toothbrush protector market, from Bonfit America Inc. The acquisition, which includes a portfolio of antibacterial toothbrush protectors, kids’ toothbrush protectors and tongue cleaners, complements our current portfolio of oral self-care products, and leverages our manufacturing and marketing platform. Operating results attributable to the products will be included in our CSCA segment. Total consideration paid was $24.7 million, subject to customary post-closing adjustments (refer to Item 8. Note 22). |
| • | On November 29, 2019, we acquired the branded OTC rights to Prevacid®24HR from GlaxoSmithKline for $61.5 million. The acquisition of Prevacid®24HRexpands our U.S. OTC presence with a leading brand in our digestive health product category (refer to Item 8. Note 3). |
Perrigo Company plc - Item 1
CSCA
| • | During the three months ended September 28, 2019, after worldwide regulatory bodies announced that Ranitidine may potentially contain N-nitrosodimethylamine ("NDMA"), a known environmental contaminant, we promptly began testing our externally-sourced Ranitidine API and Ranitidine-based products. On October 8, 2019, we halted shipments of the product based upon preliminary results. Based on the totality of data gathered, we made the decision to conduct a voluntary retail market withdrawal, which resulted in a decrease in net sales of $7.4 million and a decrease in gross profit of $15.5 million in our CSCA segment. |
| • | On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, which resulted in a pre-tax gain of $71.7 million recorded in Other (income) expense, net on the Consolidated Statements of Operations (refer to Item 8. Note 3). |
| • | On July 1, 2019, we acquired Ranir, a privately-held leading global supplier of private label and branded oral self-care products, for $747.7 million. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions (refer to Item 8. Note 3). |
| • | On April 1, 2019, we purchased the ANDAs and other records and registrations of Budesonide Nasal Spray, a generic equivalent of Rhinocort Allergy® and Triamcinolone Nasal Spray, a generic equivalent of Nasacort Allergy®, from Barr Laboratories, Inc., a subsidiary of Teva Pharmaceuticals, for a total of $14.0 million in cash (refer to Item 8. Note 3). |
Products
As we continue to transform to a consumer-focused, self-care company, we re-aligned our product categories as of December 31, 2019. The re-alignment standardizes our categories and product level detail to provide consistency across our consumer segments. This transformative step will optimize the way in which management reports and evaluates our business. Our CHCACSCA segment offers products in the following categories:
| Product Category | Description | |
| Infant | ||
| Skincare and personal hygiene | Products for the face and body such as dermatological care, scar management, lice treatment, and other products | |
| Vitamins, minerals and supplements ("VMS") | Vitamins, minerals, and supplements. | |
| Other | ||
Perrigo Company plc - Item 1
CSCA
The chart below reflects net sales by product category in the CHCACSCA segment, which includes net sales from our OTC contract manufacturing business and our now-divested animal health business for the year ended December 31, 2017.2019.
We launched a number ofseveral new CHCACSCA products in the year ended December 31, 2017,2019, most notably esomeprazole magnesium (storeLoperamide Simethicone, Nicotine cherry ice mint mini lozenge, and a store brand equivalent to Nexium® 24HR capsules), and smoking cessation products.infant formula launch at a major retailer. During the year ended December 31, 2017,2019, new product sales in the CHCACSCA segment were $68.7$36.2 million.
We, on our own or in conjunction with partners, received final FDA approval from U.S. health authorities for twothree new products within the CHCACSCA segment in the year ended December 31, 2017,2019, and as of December 31, 2017,2019, we had eightthree new product applications pending FDA approval.
Sales and Marketing
Our customers include major global, national, and regional retail drug, supermarket, and mass merchandise chains such as Walmart, Costco, CVS, Kroger, Target, Walgreens Boots Alliance, Rite Aid, Kroger, Target, Dollar General, Sam’s Club, Costco, Petco, Petsmart, Aldi,Topco, Rite Aid, and Amazon, and major wholesalers, including McKesson, Amerisource Bergen, and Cardinal Health, and Amerisource Bergen.Health.
We seek to establish customer loyalty through superior customer service by providing a comprehensive assortment of high quality, value-priced products; timely processing, shipment and delivery of orders; assistance in managing customer inventories; and support in managing and building the customer’s store brand business. The CHCACSCA segment employs its own sales force to service larger customers and uses industry brokers for other retailers.customers. Field sales employees, with support from marketing and customer service, are assigned to specific customers in order to work most effectively with the customer. They assist customers by developing customized brand and in-store marketing programs for customers' store brand products.
The primary objective of this store brand management approach is to enable our customers, retailers and wholesalers to increase sales and market share of their own store brand products by communicating store brand
Perrigo Company plc - Item 1
CSCA
quality and value to the consumer and by inviting comparison to national brand products. Our sales and marketing personnel assist customers in the development and introduction of new store brand products and in the promotion of customers’ existing store brand products by providing market information; establishing individualized promotions and marketing programs, which may include floor displays, bonus sizes, coupons, rebates, store signs, and promotional packs; and performing consumer research. As e-commerce continues to grow as a consumer channel for our products, we have developed resources, programs and tools to be a strategic marketing partner for our customers’ digital marketing efforts.
In contrast with national brand manufacturers, which incur considerable advertising and marketing expenditures targeted directly to the end user or consumer, the CHCACSCA segment’s store brand primary marketing efforts are channeled through retailers and wholesalers and reach the consumer through our customers’ in-store marketing programs and our digital media programs. Because the retail profit margin for store brand products is generally higher than for national brand products, retailers and wholesalers often commit funds for additional promotions.
In addition to in-store marketing programs, our infant formulanutrition category markets directly to consumers and healthcare professionals.
Competition
The markets for OTC pharmaceuticals and infant formulaour self-care products are highly competitive and differ for each product line and geographic region. Our primary competitors include manufacturers, such as Dr. Reddy's Labs, LNK International, Inc., PL Developments and Dr. Reddy's Labs,Aurobindo, and brand-name pharmaceutical and consumer product companies, such as Johnson & Johnson, Procter & Gamble, Pfizer, Bayer AG, GSK, Nestle S.A. (Gerber), Abbott Nutrition, Philips, and Mead Johnson Nutrition Co.Reckitt Benckiser. The competition is highly fragmented in termsvarious major categories of geographic market coverage and product categories,our CSCA business each have certain key competitors, such that a competitor generally does not compete across all product lines. However, some competitors do have larger sales volumes in certain of our categories. Additionally, national brand companies tend to have more resources committed to marketing their products and could in the future manufacture store brandsbrand versions of their products at lower prices than their national brand products. Competition is based on a variety of factors, including price, quality, assortment of products, customer service, marketing support, and approvals for new products (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for additional information and risks associated with competition).
CONSUMER HEALTHCARESELF-CARE INTERNATIONAL
Overview
The CHCICSCI segment is comprised of our branded OTC salesconsumer self-care business primarily in Europe and Australia, and our consumer focused businessesconsumer-focused business in the U.K., Australia,United Kingdom and Israel.parts of Asia. This segment also includes our United Kingdom liquid licensed products business. The CHCICSCI segment develops, manufactures, markets, and distributes many well-known European OTCconsumer self-care brands in the cough, coldupper respiratory, pain and allergy,sleep-aids, digestive health, vitamins, minerals and supplements, healthy lifestyle, skincare and personal carehygiene, and derma-therapeutics, natural health and vitamins, and anti-parasiteoral self-care categories. In addition, theThe segment leverages its broad regulatory, sales, and distribution infrastructure to in-license and sell third-party brands and generic pharmaceutical products. The CHCICSCI segment distributes these products through an extensive network of customers including pharmacies, wholesalers, drug and grocery store retailers, and para-pharmacies in 28more than 30 countries, primarily in Europe. Many CHCICSCI products have market leading positions in the markets in which they compete. During the year ended December 31, 2017,2019, the CHCICSCI segment represented approximately 30%29% of consolidated net sales.
Through continued investment in R&D partnerships and new technologies, the CHCICSCI segment strives to offer high quality self-care products that meet consumers' needs. The combination of internalInternal R&D, in-sourcing,new product development, insourcing, acquisitions, and partnerships support the new product pipeline, both in terms of brand expansionextensions and product improvement.improvements. In the U.K., R&D focuses on oral liquid formulations for the branded Rx products for which liquid formulations are not available, as well as the development of store brand products and products for the branded business. An additionalAdditional R&D center residescenters are located in Sweden.France, Sweden, Austria, Belgium, China, the U.K., Germany, and Hong Kong. In the rest of Europe, most R&D is performed by external partners with oversight by our teams. The segment has sixseven plants dedicated to manufacturing certain of its products.
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CSCI
The CHCICSCI segment primarily focuses on building local and regional brands. In many markets outside of the U.S., a brand marketing strategy can be more effective than a store brand strategy due to the absence of mass merchandisers and large scalelarge-scale pharmacy chains. Additionally, the absenceinconsistent application of athe centralized regulatory environment within Europe adds to the complexity of obtaining approvals for products in these markets.
While the CHCICSCI segment sells products from over 300200 brands, both on its own and through third parties, it focuses its resources on its "Focus brands", which are selected on the basis of their current sales and growth potential in the OTCself-care market. Additional resources are allocated to these focus brands to build strong positionsstrengthen their market position in the largest, most highly profitable categories in the OTC market, while maintaining leadership in smaller brandedhigh opportunity profit categories.
Recent Developments
| • |
| • | During the three months ended September 28, 2019, after worldwide regulatory bodies announced that Ranitidine may potentially contain NDMA, a known environmental contaminant, we promptly began testing our externally sourced Ranitidine API and Ranitidine-based products. On |
| • | On July 1, 2019, we acquired Ranir, a privately-held leading global supplier of private label and branded oral self-care products, for $747.7 million. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions. Ranir's non-U.S. operations are located primarily in the |
Products
As we continue to transform to a consumer-focused, self-care company, we re-aligned our product categories as of December 31, 2019. The combination of these actions improvedre-alignment standardizes our categories and product level detail to provide consistency across our consumer segments. This transformative step will optimize the segment'sway in which management reports and evaluates our business. Our CSCI segment offers products and focus on higher value OTC products, reduced selling costs and improved operating marginsbrands in the segment.
following categories:
CSCI
| Product Category | Description | Focus Brands | ||
| Products comprised of pain relievers, fever reducers and sleep-aids. | Solpadeine® Nytol® | |||
| Upper respiratory | Products that | Bittner® Bronchenolo®/ Physiomer® Phytosun® Coldrex | ||
| Healthy lifestyle | Products that help consumers live a healthy lifestyle such as smoking cessation, weight management, diabetes care, and well-being products. | Niquitin® XLS (Medical)® Yokebe® | ||
| Products for the face and body conditions. | ACO® Biodermal® Canoderm® Dermalex® Lactacyd® Wartner® Jungle Formula® Paranix® Pencivir® | |||
| Products used for oral care, including toothbrushes, toothbrush replacement heads, floss, flossers, and | Plackers® | |||
| Vitamins, minerals and | Vitamins, minerals, supplements. | Abtei® Davitamon® Granufink® | ||
The chart below reflects net sales by product category in the CHCICSCI segment for the year ended December 31, 2017.2019.
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We launched a number of new CHCICSCI products in the year ended December 31, 2017,2019, most notably a cold & flu triple active hot drink, various intimateXLS-Medical Forte 5, Phytosun® Aroms Organic essential oils, and ACO® brands in the healthy lifestyle, upper respiratory, and skincare and personal hygiene products, derma-therapeutics, and VMS line extensions.categories, respectively. During the year ended December 31, 2017,2019, new product sales in the CHCICSCI segment were $64.1$108.0 million.
The CHCICSCI segment has more than 100150 strategic new products in fiveacross all product categories in development, with each of its Focus brands having a five-year innovation master plan.
Sales and Marketing
Our products, including products from the Ranir acquisition, are sold to customers includeincluding pharmacies, drug stores, and grocery stores located primarily in Europe, includingsuch as Walgreens Boots Alliance, ASDA,McKesson, AS Watson, Tesco, ASDA-Walmart, DM, Rossmann, ETOS, and Kruidvat.Carrefour. The CHCICSCI segment sells its products primarily through an established pharmacy sales force to an extensive network of individual pharmacists. Our sales representatives visit pharmacists daily,frequently, ensuring strong in-store visibility of our brands and facilitating pharmacist education programs. Our sales, marketing, and regulatory teams use training/merchandising teams towho work in conjunction with local sales representatives to improve our brands' presence and recognition. We seek to attract key talent from leading OTC, Fast Moving Consumer Goods ("FMCG"), and retailer companiesto build strong local teams throughout the countries in which the CHCICSCI segment operates.
While CHCICSCI products have a higher average gross margin than products sold byin the CHCACSCA segment, selling expenses are significantly higher due to the sales force mentioned above, as well as targetedbroadcast advertising and point-of-sale promotional spending to enhance brand equity. Key marketing communication tools for the CHCICSCI segment include TVtelevision and digital commercials, consumer leaflets, product websites, digital and targeted promotional campaigns.
Competition
The competitive landscape of the European OTCconsumer products market, in the categories in which we compete, is highly fragmented, as local companies often hold leadership positions in individual product segments in particular countries. As a result, the relevant competition in each of the CHCICSCI segment's markets is both local and global. Competitors include Sarnofi,GSK, Sanofi, Bayer, Johnson & Johnson, Reckitt Benckiser, GSK,Teva, Mylan, Stada, Novartis, Zentiva, and JohnsonProcter & Johnson,Gamble, as well as additional regional competitors. We believe our key advantage lies in our unique combination of best practices in sales, marketing, and product development from
PRESCRIPTION PHARMACEUTICALS
Overview
The RX segment develops, manufactures, and markets a portfolio of generic prescription drugs primarily for sale in the U.S. We define this portfolio as predominantly "extended" topical"extended topicals", as it encompasses a broad array of topical dosage forms such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, and powders.solutions. The portfolio also includes select controlled substances, injectables, hormones, oral solid dosage forms, and oral liquid formulations. During the year ended December 31, 2017,2019, the RX segment represented approximately 20% of consolidated net sales.
We manufacture our topical and oral products in the U.S. and Israel,and also source from various FDA-approved third parties. RxRX products are manufactured, labeled, and packaged in facilities that comply with strict FDA regulatory standards and meet customers’ stringent requirements.standards.
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We actively collaborate with other pharmaceutical companies to develop, manufacture, and market certain products or groups of products. These types of collaboration agreements are common in the pharmaceutical industry. We may choose to enter into these types of agreements to, among other things, leverage our or our collaborators' scientific R&D and manufacturing expertise, or utilize our extensive marketing and distribution resources (refer to Item 8. Note 12 for more information regarding our method for recognizing revenue and expenses related to collaboration agreements, as well as Item 8. Note 1718 for more information regarding our collaboration agreements).
Recent Trends and Developments
| • | Although pricing pressure is showing some signs of moderation, during 2019 we continued to experience a significant year-over-year reduction in pricing in our RX segment due to competitive pressure. We expect softness in pricing to continue to impact the segment for the foreseeable future. |
| • | On February 24, 2020, along with our partner Catalent Pharma Solutions, we received approval from the FDA on our abbreviated new drug application for generic albuterol sulfate inhalation aerosol, the first AB-rated generic version of ProAir® HFA. Shortly after approval, we launched with limited commercial quantities and anticipate that we will be in a position to provide a steady supply of this product by the fourth quarter of 2020. |
| • | During the three months ended December 31, 2019, we tested our RX U.S. reporting unit for impairment. The impairment indicators related to a combination of industry and market factors that led to reduced projections of future cash flows. We determined the reporting unit was impaired and recorded an impairment charge of $109.2 million (refer to Item 8. Note 4 and Note 7). |
| • | During the three months ended December 31, 2019, we identified impairment indicators on a definite-lived intangible asset related to our clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®). Increases in competition caused price erosion that lowered our long-range revenue forecast, which indicated the asset was no longer recoverable and was partially impaired. We recorded an asset impairment of $21.2 million (refer to Item 8. Note 4 and Note 7). |
| • | On July 2, 2019, we purchased the ANDA for a generic gel product for $49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 (refer to Item 8. Note 3). |
| • | During the three months ended September 28, 2019, we identified impairment indicators related to our Evamist® branded product, which is a definite-lived intangible asset. The indicators related to a decline in sales volume and a corresponding reduction in our long-range revenue forecast. We recorded an asset impairment of $10.8 million (refer to Item 8. Note 4 and Note 7). |
| • | On May 17, 2019, we purchased the ANDA for a generic product used to relieve pain for $15.7 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 (refer to Item 8. Note 3). |
| • | During the three months ended June 29, 2019, we identified impairment indicators for a certain definite-lived asset related to changes in pricing and competition in the market, which lowered the projected cash flows we expect to generate from the asset. We recorded an asset impairment of $27.8 million (refer to Item 8. Note 4 and Note 7). |
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RX
Products
Listed below are some of the generic prescription products, including authorized generic and ORx®products, that we manufacture and/or distribute:
Generic Name (1) | Comparative Brand-Name Drug | |
| Alogliptin tabs | Nesina® | |
| Bacitracin ophthalmic ointment | N/A | |
| Clindamycin phosphate | ||
| N/A | ||
| Permethrin cream | Elimite® | |
| Tacrolimus | Protopic® | |
| Testosterone | Androgel® | |
| Testosterone cypionate injection | Depo®, Testosterone | |
| Triamcinolone cream/ointment | Triderm™/Kenalog™ | |
(1)Contains the same active ingredients present in the same dosage form as the comparable brand-name drug
We launched a number of new RX products in the year ended December 31, 2017,2019, most notably Scopolamine and Testosterone 2% topicalAcyclovir cream (generic equivalent to AxironZovirax® cream), Diclofenac Gel 1% (generic equivalent to Voltaren® Gel), Metronidazole Gel 0.75% (generic equivalent to MetroGel-Vaginal®)., and relaunched the Scopolamine Patch. During the year ended December 31, 2017,2019, new product sales in the RX segment were $75.9$86.3 million.
During the year ended December 31, 2017,2019, we, on our own or in collaboration with partners, received final approval from FDA health authorities for 12seven Rx drug applications, and as of December 31, 2017,2019, we had 2126 Rx drug applications pending approval.
Sales and Marketing
Our customers include major wholesalers, including Cardinal Health, McKesson, and AmerisourceBergen; sourcing groups such as Red Oak, WBAD and ClarusOne;ClarusONE, major wholesalers, national and regional retail drug, supermarket and mass merchandise chains, including Walgreens Boots Alliance, Rite Aid, Walmart, CVS, Kroger,hospitals, and Safeway; hospitals; and pharmacies. ORx® products are sold to the consumer through the pharmacy counter of predominantly the same retail outlets as our OTC pharmaceutical products.
Competition
The market for RxRX products is subject to intense competition from other generic drug manufacturers, brand-name pharmaceutical companies launching their own generic version of their branded products (known as an authorized generic), manufacturers of branded drug products that continue to produce those products after patent expirations, and manufacturers of therapeutically similar drugs. Among our generic drug manufacturer competitors are Par Pharmeceuticals, Apotex Corp.Sandoz Inc., Taro Pharmaceuticals, Mylan, Teva Pharmaceutical Industries Ltd., Glenmark Generics Inc., Impax Laboratories, Inc., Mylan, Prasco, LLC, Sandoz, Sun Pharmaceuticals, Taro Pharmaceuticals, Teva Pharmaceutical Industries Ltd.,Akorn, and Akorn.Lupin.
We believe that one of our primary competitive advantages is our ability to introduce difficult to develop and/or manufacture topical generic versions to brand-name drug products. Generally, these products are exposed to less competition due to the relatively longermore complex and more expensive development, clinical trial, and approval processes. In addition, we believe we have a favorable competitive position due primarily to our efficient distribution systems, topical production economies of scale, customer service, and overall reputation for high quality products (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for more information and risks associated with competition).
Perrigo Company plc - Item 1
INFORMATION APPLICABLE TO ALL REPORTABLE SEGMENTS
Trademarks, Patents and PatentsLicensing Agreements
While we own certain trademarks and patents, neither our business as a whole, nor any of our segments, is materially dependent upon our ownership of any one trademark, or patent, or group of trademarks or patents.
Materials Sourcing
Affordable, high qualityhigh-quality raw materials and packaging components are essential to all of our business units due to the nature of the products we manufacture. Raw materials and packaging components are generally available from multiple suppliers. Supplies of certain raw materials bulk tablets, and componentsproduct delivery systems may be more limited, as they are available from one or only a few suppliers and may require regulatory approvalextensive compatibility testing before we can use them. Prior to the sale of our Israel and India API businesses, we had the ability to manufacture and supply certain API for our OTC and Rx products, which we now source from the companies that have acquired our API business. We have been purchasing an increasing number of components and select finished goods rather than manufacturing them because of the availability of goods, economic reasons, temporary production limitations, FDA restrictions, sale of our API business,businesses, and other factors.
Historically, we have been able to react effectively, yet not always immediately, to situations that require alternate sourcing. Should such alternate sourcing be necessary, FDA requirements placed on products approved through the ANDA or NDA
process could substantially lengthen the approval of an alternate source and adversely affect financial results. We believe we have good, cooperative working relationships with substantially all of our suppliers and have historically been able to capitalize on economies of scale in the purchase of materials and supplies due to our volume of purchases (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks associated with materials sourcing).
Manufacturing and Distribution
Our primary manufacturing facilities are in the U.S. We also have manufacturing facilities in the U.K., Belgium, France, Germany, Austria, Israel, Mexico, China, and Australia, along with a joint venture in China (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks associated with our manufacturing facilities). We supplement our production capabilities with the purchase of products from outside sources. The capacity of some facilities may be fully utilized at certain times for various reasons, such as customer demand, the seasonality of the cough/cold/flu, allergy, or flea and tick seasons,certain product categories, and new product launches. We may utilize available capacity by performing contract manufacturing for other companies. We have logistics facilities in the U.S., Israel, Mexico, Australia, and numerous locations throughout Europe. We use contract freight and common carriers to deliver our products.
Significant Customers
Our primary customer base aligns with the concentration of large drug retailers in the current global retail drug industry marketplace. Walmart is our largest customer and accounted for the following percentage of consolidated net sales:
| Year Ended | Six Months Ended | Year Ended | |||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | December 27, 2014 | June 27, 2015 | |||||||||
| 13 | % | 13 | % | 13 | % | 19 | % | 16 | % | ||||
| Year Ended | |||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||
| 13.0 | % | 12.8 | % | 13.0 | % | ||
Sales to Walmart are primarily in the CHCACSCA segment. As a percentage of our total U.S. OTC sales, our sales to Walmart generally align with Walmart's U.S. retail market share in the products we sell to them. In addition, while no other customer individually comprises more than 10% of net sales, we do have other significant customers. The next five largest customers represent 25% of net sales in 2019. The loss of several of these customers could be material. We believe we generally have good relationships with all of our customers (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks associated with customers).
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Environmental
While we believe that climate change could present risks to our business, including increased operating costs due to additional regulatory requirements, physical risks to our facilities, water limitations, and disruptions to our supply chain, we do not believe these risks are material to our business in the near term.
Corporate Social Responsibility
We are committed to doing business in an ethical manner. We have a long history of environmentally sound and efficient operations, safe and healthy working conditions, and active participation in the communities where we are located. As reflected in our Corporate Social Responsibility Commitment Statement("CSR") Report available on our website, we remain committed to:
GOVERNMENT REGULATION AND PRICING
The manufacturing, processing, formulation, packaging, labeling, testing, storing, distributing, advertising, and sale of our products are subject to regulation by a variety of agencies in the localities in which our products are sold. In addition, we manufacture and market certain of our products in accordance with standards set by various organizations. We believe that our policies, operations, and products comply in all material respects with existing regulations to which we are subject (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for related risks).
United States Regulation
U.S. Food and Drug Administration
The FDA has jurisdiction over our Rx, OTC drug products, API, and Infant Formula Foods.Formula. The FDA’s jurisdiction extends to the manufacturing, testing, labeling, packaging, storage, distribution, and promotion of these products. We are committed to consistently providing our customers with high quality products that adhere to "current Good Manufacturing Practices" ("cGMP") regulations promulgated by the FDA.
OTC and Rx Pharmaceuticals
All facilities where Rx and OTC products are manufactured, tested, packaged, stored, or distributed for the U.S. market must comply with FDA cGMPs and regulations promulgated by competent authorities in the countries, states and localities where the facilities are located. All of our drug products are manufactured, tested, packaged, stored, and distributed according to cGMP regulations. The FDA performs periodic audits to ensure that our facilities remain in compliance with all appropriate regulations.
Many of our OTC products are regulated under the OTC monograph system and subject to certain FDA regulations. Under this system, selected OTC drugs are generally recognized as safe and effective and do not require the approval of an ANDA or NDA prior to marketing. Products marketed under the OTC monograph system must conform to specific quality, formula, and labeling requirements, including permitted indications, required warnings and precautions, allowable combinations of ingredients, and dosage levels. It is generally less costly to develop and bring to market a product regulated under the OTC monograph system.
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Regulation
We also market generic prescription drugs and non-prescription products that have switched from prescription to OTC status. Prior to commercial marketing, these products require approval by the FDA of an ANDA or NDA that provides information on chemistry, manufacturing controls, clinical safety, efficacy and/or bioequivalence, packaging, and labeling. While the development process for these drugs generally requires less time and expense than the development process of a new drug, the size and duration of required studies can vary greatly. Prior to the onset of the Generic Drug User Fee Amendments of 2012 (“GDUFA”), the FDA approval of generic drug applications took approximately three to five times longer than approval of innovator drugs. Pursuant to GDUFA II, beginning October 1, 2017, year five of the program, the FDA pledged to complete a first cycle review on 90% of electronic generic applications within 10 months of submission.
Under the Federal Food, Drug and Cosmetic Act, as amended ("FFDCA") (the Hatch-Waxman amendments), a company submitting an NDA can obtain a three-year period of marketing exclusivity for a prescription or OTC product if it performs a clinical study that is essential to FDA approval. Longer periods of exclusivity are possible for new chemical entities, orphan drugs (those designated under section 526 of the FFDCA) and drugs under the Generating Antibiotic Incentives Now Act. During this exclusivity period, the FDA cannot
approve any ANDAs for a similar or equivalent generic product, which can preclude another party from marketing a similar product during this period. A company may obtain an additional six months of exclusivity if it conducts pediatric studies requested by the FDA on the product. This exclusivity can delay both the FDA approval and sales of certain products.
A company may be entitled to a 180-day generic exclusivity period for certain products. This exclusivity period often follows a patent certification and litigation process whereby the product innovator may sue for infringement. The legal action does not ordinarily result in material damages, but it generally triggers a statutorily mandated delay in FDA approval of the ANDA for a period of up to 30 months from when the innovator was notified of the patent challenge.
The Food and Drug Administration Safety and Innovation Act ("FDASIA") was signed into law on July 9, 2012. The law established, among other things, new user fee statutes for generic drugs and biosimilars, FDA authority concerning drug shortages, changes to enhance the FDA's inspection authority of the drug supply chain, and a limited extension of the 30-month stay provision described above. The FDASIA also reduced the time required for FDA responses to generic-blocking citizen petitions. We implemented new systems and processes to comply with the new facility self-identification and user fee requirements of the FDASIA, and we monitor facility self-identification and fee payment compliance to mitigate the risk of potential supply chain interruptions or delays in regulatory approval of new applications.
The U.S. government's Federal Drug Supply Chain Security Act ("DSCSA") requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effective incrementally over a 10-year period. The serialization of all Rx products distributed in the U.S. needed to be completed by November 26, 2018, with the requirement for tracking the products commencing on November 27, 2023. Requirements for the tracing of products at the lot level through the pharmaceutical distribution supply chain went into effect on January 1, 2015 for manufacturers, wholesale distributors, and re-packagers, and on July 1, 2015 for dispensers.
The FDA Reauthorization Act of 2017 created a pathway by which the FDA may, at the request of an applicant, designate a drug with “inadequate generic competition” as a Competitive Generic Therapy ("CGT"). At the request of the applicant, the FDA may expedite the development and review of an ANDA for a drug designated as a CGT. The first approved application for a drug with a CGT designation for which there are no unexpired patents or exclusivities listed in the Orange Book at the time of original submission of the ANDA may be eligible for 180 days of generic exclusivity.
Active Pharmaceutical Ingredients
Third parties develop and manufacture APIs for use in certain of our pharmaceutical products that are sold in the U.S. and other global markets. API manufacturers typically submit a drug master file to the regulatory authority that provides the proprietary information related to the manufacturing process. The FDA inspects the manufacturing facilities to assess cGMP compliance, and the facilities and procedures must be cGMP compliant
Perrigo Company plc - Item 1
Regulation
before API may be exported to the U.S.
Infant Formula and Foods
The FDA’s Center for Food Safety and Applied Nutrition is responsible for the regulation of infant formula. The Office of Nutrition, Labeling and Dietary Supplements ("ONLDS") has labeling responsibility for infant formula, while the Office of Food Additive Safety ("OFAS") has program responsibility for food ingredients and packaging. The ONLDS evaluates whether an infant formula manufacturer has met the requirements under the FFDCA and consults with the OFAS regarding the safety of ingredients in infant formula and of packaging materials for infant formula.
All manufacturers of pediatric nutrition products must begin with safe food ingredients, which are either generally recognized as safe or approved as food additives. The Infant Formula Act provides specific requirements for infant formula to ensure the safety and nutrition of infant formulas, including minimum and, in some cases, maximum levels of specified nutrients.
Before marketing a particular infant formula, the manufacturer must provide regulatory agencies assurance of the nutritional quality of that particular formulation consistent with the FDA’s labeling, nutrient content, and manufacturer quality control requirements. A manufacturer must notify the FDA at least 90 days before the marketing of any infant formula that differs fundamentally in processing or in composition from any previous formulation produced by the manufacturer. We actively monitor this process and make the appropriate adjustments to remain in compliance with recent FDA rules regarding cGMP, quality control procedures, quality factors, notification requirements, and reports and records for the production of infant formulas.
In addition, the FFDCA requires infant formula manufacturers to test product composition during production and shelf-life; to keep records on production, testing, and distribution of each batch of infant formula; to use cGMP and quality control procedures; and to maintain records of all complaints and adverse events, some of which may reveal the possible existence of a health hazard. The FDA conducts yearly inspections of all facilities that manufacture infant formula, inspects new facilities during early production runs, and collects and analyzes samples of infant formula. Our infant formula manufacturing facilities have been inspected by the FDA after the effective date of the final rule and found to be in full compliance with the new GMP regulations with no corrective actions required.
Our infant and toddler foods are subject to the Food Safety Modernization Act ("FSMA"), which protects the safety of U.S. foods by mandating comprehensive, prevention-based controls within the food industry. Under FSMA, the FDA has mandatory recall authority for all food products and greater authority to inspect food producers and is taking steps toward product tracing to enable more efficient product source identification in the event of a safety issue.
U.S. Department of Agriculture
The Organic Foods Production Act enacted under Title 21 of the 1990 Farm Bill established uniform national standards for the production and handling of foods labeled as "organic." Our infant formula manufacturing sites in Vermont and Ohio adhere to the standards of the U.S. Department of Agriculture ("USDA") National Organic Program for production, handling, and processing to maintain the integrity of organic products. Our infant formula manufacturing sites in Vermont and Ohio are USDA-certified, enabling them to produce and label organic products for U.S. and Canadian markets.
U.S. Environmental Protection Agency
The U.S. Environmental Protection Agency ("EPA") is the main regulatory body in the United States for veterinary pesticides. The EPA's Office of Pesticide Programs is responsible forgoverning environmental regulation. Laws administered by the regulation of pesticide products appliedEPA, often in partnership with state agencies, include but are not limited to animals. All manufacturers of animal health pesticides must show that their products will not cause “unreasonable adverse effects to man or the environment” as stated inClean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation and Liability Act; and the Federal Insecticide, Fungicide, and Rodenticide Act. Within the U. S., pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.
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Regulation
U.S. Drug Enforcement Administration
The U.S. Drug Enforcement Administration ("DEA") regulates certain drug products containing controlled substances, such as morphine, hydromorphone, opium, testosterone, midazolam, and List I chemicals, such as pseudoephedrine, pursuant to the federal Controlled Substances Act ("CSA"). The CSA and DEA regulations impose registration, security, record keeping, reporting, storage, manufacturing, distribution, importation and other requirements upon legitimate handlers under the oversight of the DEA. The DEA categorizes controlled substances into Schedules I, II, III, IV, or V, with varying qualifications for listing in each schedule. We are subject to the requirements regarding the controlled substances in Schedules II - V and the List I chemicals. Our facilities that manufacture, distribute, import, or export any controlled substances must register annually with the DEA.
The DEA inspects all manufacturing facilities to review security, record keeping, reporting, and handling prior to issuing a controlled substance registration, and it also periodically inspects facilities for compliance with the CSA and its regulations. Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action, such as civil penalties, refusal to renew necessary registration, or the initiation of proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution. We are also subject to state laws regulating the manufacture and distribution of certain products.
Federal Healthcare Programs and Drug Pricing Regulation
Within the U.S., government healthcare insurance and welfare programs such as the Medicare and Medicaid programs are important third party payers for patients who take our products. These programs include several indirect forms of price regulation applicable to our drug products as a condition tofor coverage and/or payment for our products and also regulate the amount that pharmacies and other healthcare providers will be paid for our products. Specifically, U.S. law requires that a pharmaceutical manufacturer, as a condition of having federal funds being made available for the manufacturer’s drugs under Medicaid and Medicare Part B, enter into three government pricing program agreements: (i) a Medicaid rebate agreement with the Secretary of Health and Human Services (“HHS”) to pay rebates to state Medicaid programs for the manufacturer’s covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program; (ii) a 340B program agreement with the Secretary of HHS to provide discounts to certain “covered entity” safety net healthcare providers; and (iii) a Master Agreement with the Department of Veterans Affairs ("VA"(the "VA") under which discounts are available for purchases by federal agencies. We have such agreements in effect.
Medicaid Rebate Agreement
The Medicaid rebate agreement requires the drug manufacturer to remit rebates to each state Medicaid agency on a quarterly basis for both fee-for-service and Medicaid managed care organization utilization. Rebate amounts are based on pricing data reported by the manufacturer to the Centers for Medicare & Medicaid Services (“CMS”), including Average Manufacturer Price ("AMP") and, in the case of innovator products, Best Price ("BP"). U.S. law also requires that a company that participates in the Medicaid rebate program report average sales price ("ASP") information to CMS for each calendar quarter for certain categories of drugs that are paid under Part B of the Medicare program. CMS uses these submissions to determine payment rates for drugs under Medicare Part B.
Under the Medicaid rebate program, the minimum rebate amounts due are as follows: (i) for noninnovator products, in general generic drugs marketed under ANDAs, the rebate amount is 13% of the AMP for the quarter; and (ii) for innovator products, in general brand-name products marketed under NDAs, the rebate amount is the greater of 23.1% of the AMP for the quarter or the difference between such AMP and the BP for that same quarter. Manufacturers also pay an “additional rebate" on both innovator and noninnovator drugs where price increases since launch have outpaced inflation. Beginning with the first quarter of 2017, an additional rebate is due for noninnovator products, which is calculated somewhat differently from the innovator product additional rebate, but likewise generally applies where and to the extent that a manufacturer’s AMP increases faster than the rate of inflation.
CMS issued a final regulation, generally effective April 1, 2016, to implement changes to the Medicaid rebate program under the 2010 health reform legislation (“Health Reform Law”) and otherwise to provide program guidance. In addition to guidance concerning rebate program administration matters, the regulation also addressed
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certain related Medicaid reimbursement matters. First, under the Health Reform Law, CMS has also begun to use manufacturer AMP data to calculate reimbursement limits for pharmacies for multiple source drugs under the Medicaid program, known as the federal upper limits ("FULs"). CMS also surveys and publishes retail community pharmacy acquisition cost information to provide state Medicaid agencies with a basis for comparing their own reimbursement and pricing methodologies and rates. Second, the regulation also directed states to update their Medicaid payment methodologies to provide for payment amounts designed to reflect pharmacies’ "actual acquisition costs" for drugs, a change from the prior "estimated acquisition" standard. The regulation also required states to provide the government with findings to support their compliance with this standard by April 1, 2017.
Pricing and rebate calculations are governed by statutory and regulatory requirements that are complex, vary among products and programs, can change over time, and are subject to interpretation by us, governmental or regulatory agencies, and the courts. In the case of the Medicaid rebate program, if we become aware of errors in
our prior price submissions, or a prior BP submission needs to be updated due to late arriving data, we must resubmit the updated data within specified time frames. Such restatements and recalculations increase our cost of compliance with the Medicaid rebate program, and corrections can result in an overage or underage of our rebate liability for past quarters, depending on the nature of the correction.
340B Program Agreement
The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The ceiling price is derived from the data the manufacturer reports under the Medicaid rebate program and therefore any changes to statutory or regulatory requirements applicable to the Medicaid price figures may impact the 340B ceiling price calculation as well. 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as certain hospitals that serve a disproportionate share of low-income patients.
Master Agreement with the Department of Veterans Affairs
U.S. law also requires any company that participates in the Medicaid rebate program and Medicare Part B and that wants its covered drugs paid for by certain federal agencies and grantees to enter into a Master Agreement with the VA. Under the Master Agreement, the company must offer its prescription innovator drugs for procurement under the Federal Supply Schedule (“FSS”) contracting program, and must charge certain agencies (VA,(the VA, Department of Defense, Public Health Service and the Coast Guard) no more than a statutory Federal Ceiling Price (“FCP”). The FCP is calculated based on Non-Federal Average Manufacturer Price (“NFAMP”) data we submit to the VA. FSS contracts include extensive disclosure and certification requirements and standard government terms and conditions with which we must comply. Products sold to the government under an FSS contract must comply with the requirements of the Trade Agreements regarding the allowable countries where a product is manufactured or “substantially transformed". Consistent with the VA’s interpretation of the Master Agreement, we have also entered into an agreement to pay rebates on coveredinnovator drug prescriptions dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies.
Medicare Part D “Coverage Gap” Rebates
For certain innovator products, manufacturers must also enter into an agreement with the Secretary of HHS to provide rebates with respect to utilization of their products by certain Medicare Part D beneficiaries while those patients are within the Medicare Part D benefit “coverage gap.” Manufacturers are not required to submit separate pricing data under this program; the rebate amount is calculated by CMS based on Part D plans’ “negotiated prices” paid to pharmacies.
Other Price Regulation and State Regulation
In addition to these technical government pricing regulation programs, drug pricing has come under increasing public scrutiny arising out of general concerns about high drug costs or price increases, and transparency of pricing and discounting practices within the pharmaceutical distribution system. Congress is considering various amendments to federal drug pricing laws, as well as new forms of pricing regulation. Several states including Maryland, Nevada, and California, have recently enacted laws that, prohibit “price gouging,”among other things, require manufacturers to report certain information concerning price increases exceeding certain amounts, and/
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pharmaceutical pricing or marketing practices or to provide advance notice of price increasesactions or applications for regulatory approvals to certain entities (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks related to the above-mentioned programs).
Other U.S. Regulations and Organizations
We are subject to various other federal, state, non-governmental, and local agency rules and regulations. Compliance with the laws and regulations regarding the manufacture and sale of our current products and the discovery, development, and introduction of new products requires substantial effort, expense and capital investment. Other regulatory agencies, organizations, legislation, regulationregulations and laws that may impact our business include, but are not limited to:
| • | Physician Payment Sunshine Act and Similar State Laws - This act and similar state laws require certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payment database and public reporting of the payment data. |
| • | Foreign Corrupt Practices Act of 1977 ("FCPA") - This act and other similar anti-bribery laws prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties or international organizations with the intent to obtain or retain business or seek a business advantage. |
| • | Federal Trade Commission ("FTC")- This agency oversees the advertising and other promotional practices of consumer products marketers. The FTC considers whether a product’s claims are substantiated, truthful and not misleading. The FTC also reviews mergers and acquisitions of companies exceeding specified thresholds and investigates certain business practices relevant to the healthcare industry. |
| • | International Organization for Standardization ("ISO") - The ISO Standards specify requirements for a Quality Management System that demonstrates the ability to consistently provide products that meet customer and applicable regulatory standards and includes processes to ensure continuous improvement. Our infant formula manufacturing sites are ISO 9001-2008 Certified for Quality Management Systems. ISO inspections are conducted at least annually. |
| • | United States Pharmacopeial Convention, Inc. ("USP") - The USP is a non-governmental, standard-setting organization. By reference, the FFDCA incorporates the USP quality and testing standards and monographs as the standard that must be met for the listed drugs, unless compliance with those standards is specifically disclaimed on the product’s labeling. USP standards exist for most Rx and OTC pharmaceuticals and many nutritional supplements. The FDA typically requires USP compliance as part of cGMP compliance. |
| • | Health Insurance Portability and Accountability Act ("HIPAA") - HIPAA is a set of regulations designed to protect personal information and data collected and stored in medical records. It established a national standard to be used in all doctors' offices, hospitals and other businesses where personal medical information is stored. In addition to protecting personal medical information, HIPAA also gives patients the right to view their medical records and request changes if the data is incorrect. We could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA. |
| • | Consumer Product Safety Commission ("CPSC") - The CPSC has published regulations requiring child resistant packaging on certain products including pharmaceuticals and dietary supplements. The manufacturer of any product that is subject to any CPSC rule, ban, standard or regulation must certify that, based on a reasonable testing program, the product complies with CPSC requirements. |
| • | California Safe Drinking Water and Toxic Enforcement Act ("Prop 65") - Prop 65 is a toxic right-to-know warnings law that allows the state attorney general and private enforcers to sue on behalf of the public claiming the products in question sold in California violate the law by exposing consumers to chemicals in levels above those allowed by regulation without carrying warnings. |
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| • | Other State Agencies - We are subject to regulation by numerous other state health departments, insurance departments, boards of pharmacy, state controlled substance agencies, state consumer health and safety regulations, and other comparable state agencies, each of which have license requirements and fees that vary by state. |
Regulation Outside the U.S.
We develop and manufacture products and market third-party manufactured products in regions outside the U.S., including Eastern and Western Europe, Israel, Canada, Mexico, Australia, countries in Asia, South America, and the Middle East, each of which has its own regulatory environment. The majority of our sales outside the U.S. are in the following categories: OTC/Rx pharmaceuticals, infant formulas, medical devices, dietary supplements, cosmetics, and cosmetics.oral self-care products. Other regulatory agencies, organizations and legislation that may impact our business include, but are not limited to:
| • | Privacy Regulations - We are subject to numerous global laws and regulations designed to protect personal data, such as the European Union General Data Protection Regulation (“GDPR”). The GDPR introduced more stringent data protection requirements in the EU, as well as substantial fines for breaches of the data protection rules. The GDPR increased our responsibility and potential liability in relation to personal data that we process, and we have put in place additional mechanisms to comply with the GDPR. |
| • | Transparency Laws - In various jurisdictions in which we operate, we are subject to the laws and regulations aimed at increasing transparency of financial relationships between healthcare professionals and pharmaceutical/medical device manufacturers. These acts require certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to healthcare professionals. |
| • | Anti-Bribery Laws - Various jurisdictions in which we operate have laws and regulations, including the U.K. Bribery Act 2010 and the Irish Criminal Justice (Corruption Offenses) Act 2018, aimed at preventing and penalizing corrupt and anticompetitive behavior. |
| • | Rules and Regulations Infant Formula - Outside of the U.S., country-specific regulations define the requirements that we must comply with regarding the manufacturing, testing, labeling, packaging, storage, distribution, and promotion of infant formula. We are subject to ongoing periodic inspection through these complex regulations, including by the FDA and other regulatory agencies such as the Canadian Food Inspection Agency ("CFIA"). |
European Union
OTC and Rx Pharmaceuticals
The European pharmaceutical industry is highly regulated and much of the legislative and regulatory framework is driven by the European Parliament and the European Commission. This has many benefits, including the potential to harmonize standards across the complex European market. However, obtaining regulatory agreement across member states presents complex challenges that can lead to delays in the regulatory process.
In the EU, as well as many other locations around the world, the manufacture and sale of medicinal products are regulated in a manner substantially similar to that of the U.S. requirements, which generally prohibit the handling, manufacture, marketing, and importation of any medicinal product unless it is properly registered in accordance with applicable law. The registration file relating to any particular product must contain data related to product efficacy and safety, including results of clinical testing and/or references to medical publications, as well as detailed information regarding production methods and quality control. Health ministries are authorized to cancel the registration of a product if it is found to be harmful or ineffective or if it is manufactured or marketed other than in accordance with registration conditions.
Between 1995 and 1998, the over-arching regulation that governs medicinal products was revised in an attempt to simplify and harmonize product registration. This revised legislation introduced the mutual recognition procedure (“MRP”), whereby after approval of a marketing authorization by regulatory authorities in the reference
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member state (“RMS”), additional marketing authorizations could be submitted to other concerned member states to obtain a product license. In November 2005, the medicinal product legislation was further revised to introduce the decentralized procedure (“DCP”), whereby marketing authorizations are submitted simultaneously to the RMS and select concerned member states. In 2005, the EMA also opened up the centralized procedure to sponsors of marketing authorizations for generic medicinal products. Unlike the MRP and DCP, the centralized procedure results in a single marketing authorization and product labeling across all member states that will allow a sponsor to file for individual country reimbursement and make the medicine available in all the EU countries listed on the application. Marketing authorizations and subsequent product licenses are granted to applicants only after the relevant health authority issues a positive assessment of quality, safety and efficacy of the product.
In addition to obtaining marketing authorization for each product, all member states require that a manufacturer’s facilities obtain approval from an EU Regulatory Authority. The EU has a code of GMP that each manufacturer must follow and comply with. Regulatory authorities in the EU may conduct inspections of the manufacturing facilities to review procedures, operating systems and personnel qualifications. We believe that our policies, operations and products comply in all material respects with existing regulations to which our operations are subject.
In 2011, it was first proposed that the EU Member States had to transposetransition to the European Falsified Medicines Directive (the “Directive”). The Directive was subsequently written into national law byon January 2, 2013. The transposition process is now complete.Directive made reference to a Delegated Act (the Delegated Act lists the detailed requirements for manufacturers). The Delegated Act was finalized and published in February 2017, and it provided for a two-year implementation period. As of February 2019, we are in compliance with the Delegated Act. The provisions of the Directive are intended to reduce the risk of counterfeit medicines entering the supply chain and also to ensure the quality of API manufactured outside of the EU. The Directive required the serialization of all Rx and some OTC products, similar to the DSCSA in the U.S.
In the EU, member states regulate the pricing of prescription medicinal products, and in some cases, the formulation and dosing of products. This regulation is handled by individual member state national health services. These individual regulatory bodies can result in considerable price differences and product availability among member states. The implementation of tendering systems for the pricing of pharmaceuticals in several countries generally impacts drug pricing for generics; generally, “tendering” refers to a system that requires bids to be submitted to the government by competing manufacturers to be the exclusive, or one of a few, suppliers of a product in a particular country.
Data exclusivity provisions exist in many countries, although the application is not uniform. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities
for a fixed period of time following the first approval of the brand-name product in that country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the submission of generic drug applications for some products even after the patent protection has expired.
The requirements deriving from European pharmacovigilance regulation are constantly expanding due to increasing guidance on good vigilance practices and increased communication on inspectors’ expectations. Pharmacovigilance fee regulation became effective in late 2014 to support health authority assessment of pharmacovigilance safety evaluation reports, study protocols for post authorization safety studies and referrals. Once approved, the advertising of pharmaceuticals in the EU is governed by national regulations and guidelines. Within certain member states this is overseen by a self-certification process whereas in others national governance bodies approve material prior to release.
The wholesale distribution of medicinal products is an important activity in the integrated supply chain management. The quality and the integrity of medicinal products can be affected by a lack of adequate control. To this end, the EU Commission has published guidelines on Good Distribution Practice of medicinal productsMedicinal Products for human useHuman Use in 2013. The present guidelines are based on Articles 84 and 85b(3) of medicinal products for human use directive.
Medical Devices
The EU has enacted into law numerous directives and adopted many harmonizing standards pertaining to a wide range of industrial products, including medical devices. Medical devices that comply with the requirements of
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applicable directives are entitled to bear the CE marking of conformity, which indicates that the device conforms to the applicable requirements of the directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an organization accredited by a member state. Assessment by a Notified Body includes an audit of the manufacturer’s quality system and may also include specific testing of the product. This assessment is a prerequisite for a manufacturer to commercially distribute the product throughout the EU. On May 25, 2017, the EU’s Medical Device Regulation (the “MDR”) became effective, with a three year transitional period until full application. All Class I (low risk) medical devices need to comply with the MDR by May 26, 2020, and all medical devices sold in the EU will need to be approved under the MDR by May 26, 2024. Notified Bodies, which are organizations accredited by a member state, can continue to approve medical devices under the existing Medical Device Directives (the “MDDs”) until May 26, 2020. Beginning on May 27, 2020, Notified Bodies will no longer be able to approve new medical devices under the MDDs or approve notifications of “substantial” design changes, including changes to labeling/packaging, changes to the manufacturing process, or the addition of new features and functionality, to medical devices that were approved under the MDDs.
Dietary Supplements
Dietary supplements are subject to several regulations that inform the selection of ingredient levels and how products can be described on packaging and in advertising. These regulations include: Food Supplements Directive 2002/46/EC, Food Information to Consumers Regulation (EU) No 1169/2011, Permitted Vitamins and Minerals Regulation (EC) 1170/2009, Food Additives Regulation (EC) 1333/2008, Nutritional & Health Claims Regulation (EC) No 1924/2006, the Foods Intended for Particular Nutritional Uses Directive 2009/39/EC, and Regulation (EU) 609/2013.
EU rules on nutrition and health claims, which were established by Regulation EC 1924/2006, apply to any nutritional or health claim by a manufacturer. The objective of the regulation is to ensure that claims made in food labeling or advertising are clear, accurate and based on scientific evidence. The European Food Safety Authority, an advisory panel to the European Commission, performs all scientific assessments of health claims on food and supplement labels. An EU register of nutrition and health claims exists to document approved, pending, and rejected claims.
Cosmetics
Cosmetic products in the EU market must comply with Regulation EC No. 1223/2009. This regulation requires manufacturers to prepare a product safety report prior to placing a cosmetic product in the market. In addition, for each cosmetic product placed in the market, a “responsible person” must be designated to oversee compliance with the regulation’s reporting requirements. Commission Regulation EU No. 655/2013 establishes the common criteria and justification for claims to be used in the packaging and advertising of cosmetics products.
General Product Safety Directive
The General Product Safety Directive (2001/95/EC) complements sector-specific legislation such as rules that apply to electrical and electronic goods, chemicals, and other specific product groups. Together, the General Product Safety Directive and sector specific legislation ensure the safety and traceability of products in the market (other than pharmaceuticals, medical devices, and food which are regulated under separate legislation). If our products fail to meet the General Product Safety Directive, we may incur fines.
Employees
As of December 31, 2017,2019, we had approximately 10,40011,200 full-time and temporary employees worldwide, of which approximately 24%18% were covered by collective bargaining agreements. We consider our employee relations generally satisfactory.good.
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Available Information
Our principal executive offices are located at TreasuryThe Sharp Building, Lower Grand Canal Street,Hogan Place, Dublin 2, Ireland,D02 TY74, and our North American base of operations is located at 515 Eastern Avenue, Allegan, Michigan 49010. Our telephone number is +353 1 7094000. Our website address is www.perrigo.com, where we make available free of charge our reports on Forms 10-K, 10-Q and 8-K, including any amendments to these reports, as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission ("SEC"). These filings are also available to the public at www.sec.gov and www.isa.gov.il.
| ITEM 1A. | RISK FACTORS |
| INDEX TO RISK FACTORS | PAGE NO. |
Operational Risks
We face vigorous competition from other pharmaceutical and consumer packaged goods companies that may threaten the commercial acceptance and pricing of our products.
We operate in a highly competitive environment. Our products compete against store brand, generic, and branded pharmaceuticals.health and wellness products. Competition is also impacted by changes in regulations and government pricing programs that may give competitors an advantage.
If we are unable to compete successfully, our business will be harmed through loss of customers or increased negative pricing pressure that would adversely affect our ability to generate revenue and adversely affect our operating results.
| • | As a manufacturer of generic versions of brand-name drugs through our CSCA and RX segments, we experience competition from brand-name drug companies that may try to prevent, discourage or delay the use of generic versions through various measures, including introduction of new branded products, legislative initiatives, changing dosage forms or dosing regimens, regulatory processes, filing new patents or patent extensions, lawsuits, citizens’ petitions, and negative publicity prior to introduction of a generic product. In addition, brand-name competitors may lower their prices to compete with generic products, increase advertising, or launch, either through an affiliate or licensing arrangements with another company, an authorized generic at or near the time the first generic product is launched, depriving the generic product of potential market exclusivity. |
| • | Our CSCA and RX segments may experience increased price competition as other generic companies produce the same product, sometimes for dramatically lower margins in order to gain market share. Other companies may introduce new drugs and/or drug delivery techniques that make our current products less desirable. A drug may be subject to competition from alternative therapies during the period of patent protection or regulatory exclusivity, and thereafter, we may be subject to further competition from generic products and OTC pharmaceuticals or biosimilars. |
| • | We develop and distribute branded products through our CSCAandCSCI segments. We experience competition from other brand-name companies, many of which are larger and have more resources to devote to advertising and marketing. These direct competitors may be able to adapt more quickly to changes in customer requirements. Our current and future competitors may develop products comparable or superior to those offered by us at more competitive prices. |
Our CSCA and RX segments also experience competition from generic drug manufacturers, some of whom are significantly larger than we are, who may develop their products more rapidly or complete regulatory approval processes sooner, or may market their products earlier than we do.
Perrigo Company plc- Item 1A
Risk Factors
If we do not continue to develop, manufacture, and market innovative products, introduce new line extensions, or expand into adjacent categories that meet customer demands, we may lose market share and our net sales may be negatively impacted.
Our continued growth is due in large part to our ability to develop, manufacture, and market products that meet customer requirements for quality, safety, efficacy, and cost effectiveness. Continuous introductions of new products and product categories are critical to our business. If we do not continue to develop, manufacture, and market new products, we could lose market share, and our net sales may be negatively impacted. See Item 1. Business - Research and Development for more information.
We maintain a diversified product line to function as a primary supplier for our customers. Capital investments are driven by growth, technological advancements, cost improvement and the need for manufacturing flexibility. Our future capital expenditures could vary materially due to the uncertainty of these factors. In addition, if we fail to stay current with the latest manufacturing, information and packaging technology, we may be unable to competitively support the launch of new product introductions.
Our product margins may decline over time due to our products' aging life cycles, changes in consumer choice, changes in competition for our existing products, or the introduction of next generation innovative products; therefore, new product introductions are necessary to maintain our current financial condition. If we are unable to continue to create new products, we may lose market share or experience pricing pressure, and our net sales may be negatively impacted.
| • | We must prove that the regulated generic drug products in our CSCA and RX segments are bioequivalent to their branded counterparts, which may require bioequivalence studies, and in the case of topical products, even more extensive clinical endpoint trials to demonstrate their efficacy. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly, and subject to a high degree of business risk. Products currently under development may require re-design to meet evolving FDA standards, may not perform as expected, may not pass required bioequivalence studies, or may be the subject of intellectual property challenges. Necessary regulatory approvals may not be obtained in a timely manner, if at all. Any of these events may negatively impact our net sales. |
Even if we are successful in developing a product, our customers' failure to launch one of our products successfully, or delays in manufacturing developed products, could adversely affect our operating results. In addition, the FDA or similar regulatory agency could impose higher standards and additional requirements, such as requiring more supporting data and clinical data than previously required, in order to gain regulatory clearance to launch new formulations into the market, which could negatively impact our future net sales.
Our CHCACSCA and CHCICSCI segments are impacted by changes in consumer preferences. If we are unable to adapt to these changes, we may lose market share and our net sales may be negatively impacted.
| • | The future growth and stability of U.S. store brand market share can be impacted, in part, by general economic conditions, which can influence consumers to switch to and from store brand products. Our CSCA segment sales could be negatively affected if economic conditions improve and consumers return to purchasing higher-priced brand-name products. Conversely, while store brand products present an alternative to higher-priced branded products, if economic conditions deteriorate, our CSCA segment sales could be negatively impacted if consumers forgo obtaining healthcare or reduce their healthcare spending. |
| • | Our CSCI segment's success is dependent on the continued growth in demand for its healthy lifestyle products, which includes products for weight management and well-being and smoking cessation. If demand for products in this category decreases, our CSCI segment's results of operations would be negatively impacted. |
| • | Our CSCA customers may request changes in packaging to meet consumer demands, which could cause us to incur inventory obsolescence charges and redesign costs, which in turn would negatively impact our CSCA segment's results of operations. |
Perrigo Company plc- Item 1A
Risk Factors
| • | Our nutritional product category within our CSCA segment is subject to changing consumer preferences and health and nutrition-related concerns. Our business depends, in part, on consumer preferences and choices, including the number of mothers who choose to use infant formula products rather than breastfeed their babies. To the extent that private, public, and government sources may promote the benefits of breastfeeding over the use of infant formula, there could be a reduced demand for infant formula products. We could also be adversely impacted by an increase in the number of families that are provided with infant formula by the U.S. federal government through the Women, Infants and Children program, as we do not participate in this program. |
We operate in highly regulated industries, and any inability to timely meet current or future regulatory requirements could have a material adverse effect on our business, financial position, and operating results.
We are subject to the regulations of a variety of U.S. and non-U.S. agencies related to the manufacturing, processing, formulation, packaging, labeling, testing, storing, distribution, advertising, and sale of our products as described in detail in Item 1. Business - Government Regulation and Pricing. Government regulationChanges in existing regulations or the adoption of new regulations in the marketscountries in which we operate impactscould impose restrictions or delays on our business,ability to manufacture, distribute, sell or market our products, may be difficult or expensive for us to comply with, and may adversely affect our futurerevenue, results could be materially adversely affected by changes in such regulations or policies.of operations, and financial condition. Below are some of the ways in which government regulation could impact our business and/or financial results:
We must obtain approval from the appropriate regulatory agencies in order to manufacture and sell our products in the regions in which we operate. Obtaining this approval can be time consuming and costly. There can be no assurance that, in the event we submit an application for a marketing authorization to any global regulatory agency, we will obtain the approval to market a product and/or that we will obtain it on a timely basis. Laws unique to the U.S. regulatory framework encourage generic competition by providing eligibility for first generic marketing exclusivity if certain conditions are met. If we are granted generic exclusivity, the exclusivity may be shared with other generic companies, including authorized generics; or it is possible that we may forfeit 180-day exclusivity if we do not obtain regulatory approval or begin marketing the product within the statutory requirements. Finally, if we are not the first to file our ANDA, the FDA may grant 180-day exclusivity to another company, thereby effectively delaying the launch of our product and/or possibly reducing our market share.
Global regulatory agencies regularly inspect our manufacturing facilities and the facilities of our third-party suppliers. The failure of one of our facilities, or a facility of one of our third-party suppliers, to comply with applicable laws and regulations may lead to a breach of representations made to our customers, or to regulatory or government action against us related to the products made in that facility. Such action could include suspension of or delay in regulatory approvals. If the compliance violations are severe, agencies of the government may initiate product seizure, injunction, recall, suspension of production or distribution of our products, loss of certain licenses or other governmental penalties, or civil or criminal prosecution, thereby impacting the reputation of all of our products.
In the U.S., the DSCSA requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effectiveis being implemented incrementally over a 10-year period beginning on January 1, 2015, for manufacturers, wholesale distributors, and re-packagers, and on July 1, 2015 for dispensers. Similarly,Compliance with the U.S. electronic pedigree requirements has and will continue to increase our operational expenses and impose significant administrative burdens.
The European Commission passed legislation requiring new product packaging ‘safety features’ to prevent falsification of medicinal products primarily within the
prescription medicines sector. The act was adopted February 9, 2016.All marketing authorization holders in the EU member states (with the exception of Belgium, Italy and Greece), and EEA members Norway, Iceland, Liechtenstein and Switzerland must be in compliance within three years, orwere required to introduce the necessary changes by February 9, 2019.2019 (or risk forfeiting their product licenses). However, manufacturers based out of Greece, Belgium and Italy and Greece have an extended timeline until February 9, 2025 to comply. Marketing Authorization holders will have three years from the publication date to implement the necessary changes or risk forfeitingserialization guidelines as they already feature similar requirements on their product licenses.current drug packages. Compliance with the new U.S. and EU electronic pedigree requirements mayhas and will continue to increase our operational expenses and impose significant administrative burdens.
Global regulatory agencies highly scrutinize any product application submitted to switch a product from physician prescribed Rx to unsupervised OTC use by the general public. The expansion of Rx-to-OTC
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Risk Factors
switches is critical to our future growth. Reluctance of regulatory agencies to approve Rx-to-OTC switches in new product categories could impact that growth.
Further, regulatory agencies can reassess the terms of OTC classification if they perceive a shift in the previously assessed benefit/risk profile. Any such reassessment may lead to OTC products reverting to prescription.
Our infant formula products may be subject to barriers or sanctions imposed by countries or international organizations limiting international trade and dictating the specific content of infant formula products. Governments could enhance regulations on the industry aimed at ensuring the safety and quality of dairy products, including but not limited to, compulsory batch-by-batch inspection and testing for additional safety and quality issues. Such inspections and testing may increase our operating costs related to infant formula products.
If we are unable to successfully obtain the necessary quota for controlled substances and List I chemicals, we risk having delayed product launches or failing to meet commercial supply obligations. If we are unable to comply with regulatory requirements for controlled substances and List I chemicals, the DEA, or similar regulatory agency, may take regulatory actions, resulting in temporary or permanent interruption of distribution of our products, withdrawal of our products from the market, or other penalties.
In order to commercially distribute our medical device products in the EU, they need to conform with the requirements of applicable EU directives. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body,notified body, an organization accredited by a member state, which includes an audit of the manufacturer’s quality system and, for some products, specific product testing. If our products fail to meet the applicable EU directives, then we may not meet our projected growth targets and/or incur fines and penalties.
Complying with the legislative framework for cosmetics and food supplements in the EU remains challenging as a result of changing EU regulations, diverging national regulations from EU regulations, and diverging regulations between EU member states. If our products fail to meet the applicable EU and/or national regulations, then we may not meet our projected growth targets and/or incur fines and penalties.
| • | Our operations extend to numerous countries outside the U.S. and are subject to the risks inherent in conducting business globally and under the laws, regulations, and customs of various jurisdictions. These risks include compliance with a variety of national and local laws of countries in which we do business, such as restrictions on the import and export of certain intermediates, drugs, technologies and marking of the country of origin on products imported to the U.S. We must also comply with a variety of U.S. laws related to doing business outside of the U.S., including but not limited to, Office of Foreign Asset Controls; United Nations and EU sanctions; the Iran Threat Reduction and Syria Human Rights Act of 2012; rules relating to the use of certain “conflict minerals” under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and regulations enforced by the U.S. Customs and Border Patrol. Further changes in laws, regulations, and practices affecting the pharmaceutical industry and the healthcare system, including imports, exports, manufacturing, quality, cost, pricing, reimbursement, approval, inspection, and delivery of healthcare, may affect our business and operations. |
Perrigo Company plc- Item 1A
Risk Factors
Continuing Healthcarehealthcare reforms and related changes to reimbursement methods in and outside of the United States may have an adverse effect on our financial condition and results of operations.
Increasing healthcare expenditures have received considerable public attention in many of the countries in which we operate. In the U.S., government programs such as Medicare and Medicaid, as well as private insurers, have been focused on cost containment. In some markets in the EU and outside the U.S., the government provides healthcare at low direct cost to consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system. Both private and governmental entities are seeking ways to reduce or contain healthcare costs. For example, the proposed Affordable Drug Manufacturing Act would create a new office within the U.S. Department of Health and Human Services tasked with manufacturing certain generic drugs to be offered directly to consumers. It is unclear if this proposed legislation will be enacted, but these or similar legislative or regulatory efforts could place further pricing pressure on our products and could negatively impact our results of operations.
Our RX segment in particular could be materially adversely impacted by measures taken by governmental entities or private insurers to restrict patients' access to our products or increase pressure on drug pricing, including denial of price increases, prospective and retrospective price decreases, and increased mandatory discounts or rebates. These actions may drive us and our competitors to decrease prices or may reduce the ability of customers to pay for our products, which could materially negatively impact the RX segment's results of operations.
If we fail to comply with the reporting and payment obligations under the Medicaid rebate program or other governmental purchasing and rebate programs, we could be subject to fines or penalties, which could have an adverse effect on our financial condition and results of operations.
As described inItem 1. Business - Medicaid Drug Rebate ProgramsAgreement, we have entered into various government drug pricing agreements with the U.S. government. There are inherent risks associated with participating in these programs, including the following:
By their nature, these programs require us to provide discounts and rebates and therefore reduce our net product revenues.revenue. Further, because the amounts of these discounts are based on our commercial sales practices and can be adversely affected by both significant discounts and price increases, it is important that we maintain pricing practices that appropriately take into account these government pricing programs.
We are required to report pricing data to CMS, including AMP, on a monthly and quarterly basis and BP and ASP on a quarterly basis. We also are required to report quarterly and annual Non-FAMPs to the VA. If we fail to submit required information on a timely basis, make misrepresentations, or knowingly submit false information to the government as to AMP, ASP, or BP, we may be liable for substantial civil monetary penalties or subject to other enforcement actions, such as under the False Claims Act, and CMS may terminate our Medicaid drug rebate agreement. In that event, U.S. federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.
Because many of our products may be subject to Medicaid FULs or CMS’s new Medicaid “actual acquisition cost” payment methodology standard, our products may be subject to reimbursement pressures, and in some cases, those pressures may result from practices outside of our control, including how our competitors price their equivalent products. Based on our initial evaluation, we do not believe that the changes have had a material impact on our business. However, statesStates are continuing to evaluate their payment methods, and we cannot predict how the new FUL or state payment methodologies will affect our pharmacy customers or to what extent these customers may seek additional discounts in light of reimbursement changes.changes in the future. We also cannot predict how the sharing of FUL data and retail survey prices may impact competition in the marketplace in the future.
Under the 340B program, if we fail to provide required discounts to covered entities, including in connection with the revision of AMP or BP data, we may be subject to refund claims or civil moneymonetary penalties under that program.
program pursuant to new program regulations that became effective January 1, 2019.
If we inadvertently overcharge the government in connection with our FSS contract or TriCare Agreement, whether due to a misstated FCP or otherwise, we would be required to refund the difference. Failure to make necessary disclosures and/or to identify contract overcharges can result in False Claims Act allegations or potential violations of other laws and regulations. Unexpected refunds to the government, and responses to a government investigation or enforcement action, are expensive and time-consuming, and
Perrigo Company plc- Item 1A
Risk Factors
could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions. Our calculations and methodologies are subject to review by the governmental agencies, and it is possible that these reviews could result in challenges to our submissions. If we do not comply with those reporting and payment obligations, we could be subject to civil and/or criminal sanctions, including fines, penalties, and possible exclusion from U.S. federal healthcare programs.
Lack of availability, or significant increases in the cost, of raw materials used in manufacturing our products could adversely impact our profit margins and operating results.
Affordable high quality raw materials and packaging components are essential to all of our business units due to the nature of the products we manufacture. In addition, maintaining good supply relationships is essential to our ongoing operations. SeeItem 1. Business - Materials Sourcingfor more information.
We maintain several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous due to regulatory, performance, quality, support, or price considerations. Unavailability or delivery delays of single-source components or products could adversely affect our ability to ship the related product in a timely manner. The effect of unavailability or delivery delays would be more severe if associated with our higher-volume or more profitable products. Even where alternative sources of supply are available, qualifying the alternate suppliers and establishing reliable supplies could cost more or result in delays and a loss of net sales. Additionally, global regulatory requirements for obtaining product approvals could substantially lengthen the approval of an alternate material source. As a result, the loss of a single-source supplier could have a material adverse effect on our results of operations.
The rapid increase in cost of many raw materials from inflationary forces, such as increased energy costs, and our ability or inability to pass on these increases to our customers could have a negative material impact on our financial results.
Our infant formula products require certain key raw ingredients that are derived from raw milk, such as skim milk powder, whey protein powder, and lactose. Our supply of milk-based ingredients may be limited by the ability of individual dairy farmers and cooperatives to provide raw milk in the amount and quality we deem necessary. Raw milk production is influenced by factors beyond our control including seasonal and environmental factors, governmental agricultural and environmental policy, and global demand. We cannot guarantee that there will be sufficient supplies of these key ingredients necessary to produce infant formula.
Our products, and the raw materials used to make the products mentioned above, generally have limited shelf lives. Our inventory levels are based, in part, on expectations regarding future sales. We may experience build-ups in inventory if sales slow. Any significant shortfall in sales may result in higher inventory levels of raw materials and finished products, thereby increasing the risk of inventory spoilage and corresponding inventory write-downs and write-offs. Cargo thefts and/or diversions and economically or maliciously motivated product tampering on store shelves may occur, causing unexpected shortages and harm to our reputation, which may have a material impact on our operations.
We rely on third parties to source many of our raw materials, as well as to manufacture certain dosage forms such as sterile, injectable products that we distribute. We maintain a strict program of verification and product testing throughout the ingredient sourcing and manufacturing process to identify potential counterfeit ingredients, adulterants, and toxic substances. Nevertheless, discovery of previously unknown problems with the raw materials or product manufacturing processes, or new data suggesting an unacceptable safety risk associated therewith, could result in a voluntary or mandatory withdrawal of the contaminated product from the marketplace, either temporarily or permanently. Any future recall or removal would result in additional costs and lost revenue, harm our reputation, and may give rise to product liability litigation.
Changes in regulation could impact the supply of the API and certain other raw materials used in our products. For example, the EU recently promulgated new standards requiring all API imported into the EU be certified as complying with GMP established by the EU. The regulations placed the certification
Perrigo Company plc- Item 1A
Risk Factors
requirement on the regulatory bodies of the exporting countries, which led to an API supply shortage in Europe as certain governments were not willing or able to comply with the regulation in a timely fashion, or at all. In addition, due to the recent outbreak of the coronavirus, we could experience supply disruptions related to materials sourced directly and indirectly from China or elsewhere. A shortage in API or other raw ingredients could cause us to have to cease manufacture of certain products, or to incur costs and delays to qualify other suppliers to substitute for those API manufacturers who are unable to export. This could have a material adverse effect on our business, results of operations, financial condition, and cash flow.
A disruption at any of our main manufacturing facilities could materially and adversely affect our business, financial position, and results of operations.
Our manufacturing operations are concentrated in a few locations. SeeItem 1. Business - Manufacturing and Distribution for more information on our significant operations. A significant disruption at one or more of these facilities, whether it be due to fire, natural disaster, power loss, intentional acts of vandalism, climate change, war, terrorism, insufficient quality, or pandemic could materially and adversely affect our business.
Additionally, regulatory authorities routinely inspect all of our manufacturing facilities for cGMP compliance. While our manufacturing sites are cGMP compliant, if a regulatory authority were to identify serious adverse findings not corrected upon follow up inspections, we may be required to issue product recalls, shutdown manufacturing facilities, and take other remedial actions. If any manufacturing facility were forced to cease or limit production, our business could be adversely affected.
Any breach, disruption or misuse of our or our external business partners’ information systems or cyber security efforts or personal data could have a material adverse effect on our business.
We are increasingly dependent upon information technology systems to operate our business. Our systems, information and operations as well as our independent vendor relationships (where they support information technology and manufacturing infrastructure), are highly complex.complex and interrelated with our external business partners. These systems may contain confidential information (including personal data, trade secrets or other intellectual property, or proprietary business information). The sizenature of digital systems, both internally and complexity of these systemsexternally, makes them potentially vulnerable to disruption or damage from human error and/or security breaches, hacking,which include, but are not limited to, ransomware, data theft, denial of service attacks, human error, sabotage, industrial espionage, and computer viruses. Such events may be difficult to detect, and once detected, their impact may be difficult to assess.assess and address.
Cyber attacks have become increasingly common for us and our external business partners, and we have experienced immaterial business disruption and data loss as a result of phishing, business email compromise and other types of attacks on our information technology systems and those of our external business partners. While we continue to employ resources to monitor our systems and protect our infrastructure, these measures may prove insufficient depending upon the attack or threat posed.posed, and that could subject us to significant risks, including, without limitation:
which, individually or collectively, could result in financial, legal, business andor reputational harm to us and could have a material adverse effect on our business, financial condition and results of operations.
In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures and viruses. If we are unable to execute our disaster recovery and business continuity plans, or if our plans prove insufficient for a
Perrigo Company plc- Item 1A
Risk Factors
We are also subject to numerous laws and regulations designed to protect personal data, such as the California Consumer Privacy Act and national laws implementing the GDPR. These data protection laws introduced more stringent data protection requirements and significant potential fines, as well as increased our responsibility and potential liability in relation to personal data that we process. We have put mechanisms in place to ensure compliance with applicable data protection lawsbut there can be no guarantee of their effectiveness.
Our business depends upon certain customers for a significant portion of our sales, therefore our business would be adversely affected by a disruption of our relationship with these customers or any material adverse change in these customers' businesses.
Sales to our largest customer, Walmart, comprised approximately 13%13.0% of our net sales for the year ended December 31, 2017.2019. While no other customer individually comprised more than 10% of net sales, we do have other significant customers. If our relationship with Walmart or any of our other significant customers, including the terms of doing business with the customers, changes significantly, it could have a material adverse impact on us (refer toItem 1. Business - Significant Customers).
Many of our customers, which include chainmajor global, national, and regional retail drug, supermarket, and mass merchandise chains, major wholesalers, sourcing groups, hospitals, pharmacies, and drug and grocery stores wholesalers, distributors, hospital systems, and group purchasing organizations,located primarily in Europe, continue to merge or consolidate. Such consolidation has provided, and may continue to provide, customers with additional purchasing leverage, and consequently may increase the pricing pressures we face. The emergence of large buying groups representing independent retail pharmacies enable those groups to extract price discounts on our products. In addition, a numberseveral of our customers have instituted sourcing programs limiting the number of suppliers of generic pharmaceutical products carried by that customer. These developments have resulted in heightened pricing pressure on our products, as well as competition among generic drug producers for business from a smaller and more selective customer base.
Additionally, if we are unable to maintain adequately high levels of customer service over time, customers may choose to assess penalties, obtain alternate sources for products, and/or end their relationships with us.
Although we have divested our rights to the Tysabri® royalty stream, we are entitled to an additional milestone paymentspayment if a certain specified thresholds arethreshold is met, and any negative developments related to Tysabri® could have a material adverse effect on our potential receipt of those payments.this payment.
We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. Upon Tysabri® meeting the 2018 global net sales threshold we recorded a $170.1 million gain in Change in financial assets. The fair value of Tysabri® meet specific thresholds in 2018 andthe milestone payment related to 2020 respectively.is $95.3 million as of December 31, 2019. Our receipt of thesethe milestone paymentspayment related to 2020 may be negatively impacted if the royalty streams decreasestream decreases and areis insufficient to meet the specified thresholds. Given the fact thesethat the milestone payments arepayment related to 2020 is recorded at fair value, if it is determined that Tysabri® global sales levels do not meet specific thresholds, we would recognize a material charge in the Consolidated Statement of Operations. Factors that may have an adverse effect on the Tysabri® royalty stream include:
| • | Companies working to develop new therapies or alternative formulations of products for multiple sclerosis that, if successfully developed, would compete with, or could gain greater acceptance than, Tysabri® and damage |
Perrigo Company plc- Item 1A
Risk Factors
product competes with Tysabri® and could have a significant negative impact on the Tysabri® royalty stream;
| • | Biogen is the owner of the patents on Tysabri®. The loss of protection of these patents, such as a patent invalidation, could adversely affect the royalty stream from Tysabri®. In addition, once the Tysabri® patents expire, other generic companies may introduce products similar to Tysabri® that could adversely affect the royalty stream; |
| • | Foreign currency movement, which could have a negative impact on |
| • | Any negative developments relating to Tysabri®, such as safety, efficacy, or reimbursement issues, could reduce demand for Tysabri®; and |
| • | Adverse regulatory or legislative developments could limit or prohibit the sale of Tysabri®, such as restrictions on the use of Tysabri® or safety-related label changes, including enhanced risk management programs, which may significantly reduce expected royalty revenue and require significant expense and management time to address the associated legal and regulatory issues. |
Additionally, Tysabri® sales growth cannot be assured given the significant restrictions on its use and the significant safety warnings on the label, including the risk of developing Progressive Multifocal Leukoencephalopathy ("PML"), a serious brain infection. The risk of developing PML mayincrease with prior immunosuppressant use, longer treatment duration, or the presence of certain antibodies. Increased incidence of PML could limit sales growth, prompt regulatory review, require significant changes to the label, or result in market withdrawal. In addition, the result of ongoing or future clinical trials involving Tysabri® or other adverse events reported in association with the use of Tysabri® may have an adverse impact on prescribing behavior and reduce sales of Tysabri®.
Furthermore, there can be no assurance that Royalty Pharma will pay either or both of the 2020 milestone paymentspayment even if the specified thresholds are met.
We are dependent on the services of certain key members of management. Our inability to successfully manage transition, or the failure to attract and retain other key members of management, may have a material adverse impact on our results of operations.
We are dependent on the services of certain key employees, and our future success will depend in large part upon our ability to attract and retain highly skilled employees. Key functions for us include executive managers, operational managers, R&D scientists, information technology specialists, financial and legal specialists, regulatory professionals, quality compliance specialists, and sales/marketing personnel. If we are unable to attract or retain key qualified employees, our future operating results may be adversely impacted.
Management transition creates uncertainties, and any difficulties we experience in managing such transitions may negatively impact our business.
Unfavorable publicity or consumer perception of the safety, quality, and efficacy of our products could have a material adverse impact on our business.
We are dependent upon consumers' perception of the safety, quality, and efficacy of our products, and may be affected by changing consumer preferences. Negative consumer perception may arise from media reports, product liability claims, regulatory investigations, or recalls, regardless of whether they involve us or our products. The mere publication of information asserting defects in products or ingredients, or concerns about our products or the materials used in our products, could discourage consumers from buying our products, regardless of whether such information is scientifically supported.
Perrigo Company plc- Item 1A
Risk Factors
Our products involve risks such as product contamination, spoilage, mislabeling, and tampering that could require us to recall one or more of our products. Serious product quality concerns could also result in governmental actions against us that, among other things, could result in the suspension of production or distribution of our products, product seizures, loss of certain licenses, delays in the issuance of governmental approvals for new products, or other governmental penalties, all of which could be detrimental to our reputation and reduce demand for our products.
We cannot guarantee that counterfeiting, imitation or other tampering with our products will not occur or that we will be able to detect and resolve it. Any counterfeiting or contamination of any products could negatively impact our reputation and sales, particularly if counterfeit or imitation products cause death or injury to consumers.
Many of the brands we acquired from Omega Pharma Invest N.V ("Omega") have European recognition. This recognition is the result of the large investments Omega has made (and we continue to make) in its products over many years. The quality and safety of the products are critical to our business. If we are unable to effectively manage real or perceived issues, including concerns about safety, quality, efficacy, or similar matters, sentiments toward us and our products could be negatively impacted.
| • | Our CSCI segment's financial success is dependent on the success of its brands, and the success of these brands can suffer if marketing plans or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers, and the performance of the segment may be negatively impacted if spending on such plans and initiatives does not generate the returns we anticipate. In addition, given the association of individual products within the commercial network of our CSCI segment, an issue with one of our products could negatively affect the reputation of other products, thereby potentially hurting our financial results. |
Powdered infant formula products are not sterile. All of our infant formula products must be prepared and maintained according to label instruction to retain their flavor and nutritional value and avoid contamination or deterioration. Depending on the product, a risk of contamination or deterioration may exist at each stage of the production cycle, including the purchase and delivery of raw materials, the processing and packaging of food products, and the use and handling by consumers, hospital personnel, and healthcare professionals. In the event thatIf certain of our infant formula products are found or alleged to have suffered contamination or deterioration, whether or not under our control, our reputation and our infant formula product category sales could be materially adversely affected.
Increasing use of social media could give rise to liability, breaches of data security, or reputation damage.
The Company and our employees increasingly utilize social media as a means of internal and external communication.
To the extent that we seek to use social media tools as a means to communicate about our products and/or business, there are uncertainties as to the rules that apply to such communications, or as to the interpretations that authorities will apply to the rules that exist. As a result, despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that our use of social media for such purposes may cause us to be found in violation of them. A violation of such guidelines may damage our reputation as well as cause potential lawsuits and adversely affect our operating activities.
Our employees may knowingly or inadvertently make use of social media tools in ways that may not be aligned with our social media strategy, may give rise to liability, or could lead to the loss of trade secrets or other intellectual property, or public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers, and others.
Negative posts or comments about us, store brands or generic pharmaceuticals, or our products in social media could seriously damage our reputation and could adversely affect the price of our securities.business. In addition, negative posts or comments about our products could result in increased pharmacovigilance reporting requirements, which may give rise to liability if we fail to fully comply with such requirements.
Perrigo Company plc- Item 1A
Risk Factors
Our quarterly results are impacted by a number ofseveral factors, some of which are beyond the control of our management, that may result in significant quarter-to-quarter fluctuations in operating results.
Some of the factors that may impact our quarterly results include, but are not limited to, the severity, length and timing of the cough/cold/flu and allergy seasons, the flea and tick season, the timing of new product approvals and introductions by us and our competitors, price competition, changes in the regulatory environment, changes in accounting pronouncements, changes in the levels of inventories maintained by our customers, and the timing of retailer promotional programs. These and other factors may result in significant variations in our operating results from quarter to quarter.
We may not be able to sustain or improve operating results in our business segments.
success of strategic improvement initiatives. There can be no assurance that we will not continue to experience challenges related to our segments, and these challenges could have a material impact on our business, cash flows, and results of operations or result in impairment charges, and the market value of our ordinary shares and/or debt securitiesmay decline.
We may not realize the benefits of business acquisitions and divestitures we enter into, which could have a material adverse effect on our operating results.
In the normal course of business, we engage in discussions relating to possible acquisitions and divestitures. These transactions are accompanied by a number ofseveral risks. Many of these risks are beyond our control, and any one of them could result in increased cost, decreased net sales and diversion of management’s time and energy, any or all of which could materially impact our business, financial condition, and results of operations.
Acquisitions
One of our strategies is inorganic growth through the acquisition of products and companies that we expect will benefit the Company. This strategy comes with a number ofseveral financial, managerial, and operational risks. We may not realize the benefits of an acquisition because of integration and other challenges, including, but not limited to the following:
Difficulty involved with managing the expanded operations of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities;
Uncertainties involved in assessing the value, strengths, and potential profitability of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities of acquisition targets;
Unanticipated changes in the business, industry, market or general economic conditions different from the assumptions underlying our rationale for pursuing the transaction;
Difficulties due to a lack of, or limited experience in, any new product or geographic markets we enter;
Inability to achieve identified operating and financial synergies, or return on investment, from an acquisition in the amounts or on the time frame anticipated;
Substantial demands on our management, operational resources, technology, and financial and internal control systems, which could lead to dissatisfaction and potential loss of key customers, management, or employees;
Integration activities that may detract attention from our day-to-day business, and substantial costs associated with the transaction process or other material adverse effects as a result of these integration efforts; and
Difficulties, restrictions or increased costs associated with raising future capital in connection with an acquisition may impact our liquidity, credit ratings and financial position, thereby making it more difficult, restrictive or expensive to raise future capital. In addition, the issuance of equity to pay a portion of the purchase price for an acquisition would dilute our existing shareholders.
Perrigo Company plc- Item 1A
Risk Factors
Divestitures
We may evaluate potential divestiture opportunities with respect to portions of our business (including specific assets or categories of assets) from time to time, and may proceed with a divestiture opportunity if and when we believe it is consistent with our business strategy and initiatives. Any future divestitures could expose us to significant risk, including without limitation:
Our ability to effectively transfer liabilities, contracts, facilities and personnel to any purchaser;
Fees for legal and transaction-related services;
Diversion of management resources; and
Loss of key personnel and reduction in revenue.
If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operations.
The plan to separate our RX business is contingent upon several conditions, is subject to change in form or timing, may not achieve the intended benefits, and could adversely affect our business and financial condition.
On August 9, 2018, we announced a plan to separate our RX business, which, when completed, will enable us to focus on expanding our consumer-focused businesses. In 2019, we continued preparations related to our planned separation, which may include a possible sale, spin-off, merger or other form of separation. While we remain committed to transforming to a consumer-focused business, we have not committed to a specific date or form for the separation.
The separation of the RX business could impact our ability to retain key employees, comply with existing debt arrangements, maintain our credit ratings and raise future capital. Further, even if the separation is completed, we may not achieve the anticipated operational, financial, strategic or other benefits of the separation. After the separation, the combined value and financial performance of the Company and RX business may not equal the value and financial performance of the Company had the separation not occurred.
In connection with the proposed separation, we have incurred significant preparation costs and will continue to incur costs that, when completed, will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on the final timing and structure of the transaction. In addition, completion of the separation will require a significant amount of management time and effort, which may disrupt our business or otherwise divert management’s attention from other aspects of our business, including our other strategic initiatives, possible organic or inorganic growth opportunities, and customer and vendor relationships. Any of the foregoing risks could adversely affect our business, results of operations, liquidity, and financial condition.
Our business could be negatively affected by the performance of our collaboration partners and suppliers.
We have entered into strategic alliances with partners and suppliers to develop, manufacture, market and/or distribute certain products, or components of our products in various markets. We commit substantial effort, funds and other resources to these various collaborations. There is a risk that our investments in these collaborative arrangements will not generate financial returns. While we believe our relationships with our partners and suppliers generally are successful, disputes, conflicting priorities or regulatory or legal intervention could be a source of delay or uncertainty as to the expected benefit of the collaboration (refer to Item 8. Note 1718 for additional detail on our collaborative agreements and other contractual arrangements)). A failure or inability of our partners or suppliers to fulfill their collaboration obligations, or the occurrence of any of the risks above, could have an adverse effect on our business, financial condition, and results of operations.
We have acquired significant assets that could become impaired or subject us to losses and may result in an adverse impact on our results of operations.
We have recorded significant goodwill and intangible assets and goodwill on our balance sheet as a result of previous acquisitions, which could become impaired and lead to material charges in the future.
Perrigo Company plc- Item 1A
During the year ended December 31, 2019, we recorded a goodwill impairment charge of $109.2 million in our RX segment, definite-lived impairment charges of $69.5 million in our RX and CSCI segments, and $5.8 million of impairment charges related to certain in-process research and development ("IPR&D") assets in our CSCA, CSCI, and RX segments.
During the year ended December 31, 2018, we recorded goodwill, definite-lived and indefinite-lived intangible asset impairment charges of $136.7 million, $49.6 million and $27.7 million primarily in our CSCA segment, respectively, and $8.7 million of impairment charge related to certain IPR&D assets in our CSCA segment.
During the year ended December 31, 2017, we recorded definite-lived intangible asset impairment charges of $19.7 million related to developed product technology/formulation and product rights, and distribution and license
agreements primarily in our RX segment and $12.7 million of impairment charge related to certain IPR&D assets primarily in our RX segment.
We perform an impairment analysis on intangible assets subject to amortization when there is an indication that the carrying amount of any individual asset may not be recoverable. Any significant change in market conditions, estimates or judgments used to determine expected future cash flows that indicates a reduction in carrying value may give rise to impairment in the period that the change becomes known. Goodwill, indefinite-lived intangible asset, and definite-lived intangible asset impairments are recorded in Impairment charges on the Consolidated Statement of Operations. As of December 31, 2017,2019, the net book value of our goodwill and intangible assets and goodwill were $3.4$4.1 billion and $4.2$3.0 billion, respectively. Seerespectively (refer toItem 8. Note 34for more information on the above impairment charges.).
There can be no assurance that our strategic initiatives will achieve their intended effects.
We are in the process of implementing certain initiatives designed to increase operational efficiency and improve our return on invested capital by globalizing our supply chain through global shared service arrangements, streamlining our organizational structure, making key executive employee changes, performing a strategic portfolio review, and disposing of certain assets. Furthermore, we are transitioning into a consumer-focused, self-care company. We believe these initiatives will enhance our net sales, operating margins, and earnings; however, there can be no assurance that these initiatives will produce the anticipated benefits. Any delay or failure to achieve the anticipated benefits could have a material adverse effect on our projected results.
We are required to evaluate the priceeffectiveness of our ordinary shares.
While we have remediated those previously identified material weaknesses, there can be no assurances that was identified during our fiscal year ended December 31, 2016 was not remediated duringcontrols will remain adequate. Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, including retention of key employees, could result in additional material weaknesses or material misstatements in our fiscal year ended December 31, 2017, and we determinedConsolidated Financial Statements. Any new misstatement could cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. We cannot assure you that we didwill not design or maintain effective controls over our income tax accounting process. As a result of the materialdiscover additional weaknesses we concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, April 1, 2017, July 1, 2017, September 30, 2017 or December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The failure to maintain effective control over financial reporting in turn resulted in material deficiencies in our disclosure controls and procedures.
Perrigo Company plc- Item 1A
Risk Factors
Global Risks
Our business, financial condition, and results of operations are subject to risks arising from the international scope of our operations.
We manufacture, source raw materials, and sell our products in a number of countries. The percentage of our business outside the U.S. has been increasing. We are subject to risks associated with international manufacturing and sales, including:
Unexpected changes in regulatory requirements;
Problems related to markets with different cultural biases or political systems;
Possible difficulties in enforcing agreements;
Longer payment cycles and shipping lead-times;
Difficulties obtaining export or import licenses;
Changes to U.S. and foreign trade policies, including the enactment of tariffs on goods imported into the U.S., including but not limited to, goods imported from Mexico;China; and
Imposition of withholding or other taxes.
Additionally, we are subject to periodic reviews and audits by governmental authorities responsible for administering import/import and export regulations. To the extent that we are unable to successfully defend against an audit or review, we may be required to pay assessments, penalties, and increased duties.
Certain of our facilities operate in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board, which allows us certain tax advantages on products and raw materials shipped through these facilities. If the Foreign Trade Zone Board were to revoke the sub-zone designation or limit our use, we could be subject to increased duties.
Although we believe that we conduct our business in compliance with applicable anti-corruption, anti-bribery and economic sanctions or other anti-corruption laws, if we are found to not be in compliance with such laws or other anti-corruption laws, we could be subject to governmental investigations, legal or regulatory proceedings, substantial fines, and/or other legal or equitable penalties. This risk increases in locations outside of the U.S., particularly in locations that have not previously had to comply with the FCPA, U.K. Bribery Act 2010, Irish Criminal Justice (Corruption Offenses) Act 2018, and similar laws.
We operate in jurisdictions that could be affected by economic and political instability, which could have a material adverse effect on our business.
Our operations and supply partners could be affected by economic or political instability, embargoes, military hostilities, unstable governments and legal systems, and inter-governmental disputes. We have significant operations in Israel, which has experienced varying degrees of hostility in recent years. Doing business in Israel and certain other regions involves the following risks:
Certain countries and international organizations have refused to do business with companies with Israeli operations. We are also precluded from marketing our products to certain countries due to U.S. and Israeli regulatory restrictions. International economic sanctions and boycotts of our products could negatively impact our sales and ability to export our products.
Our facilities in Israel are within a conflict zone. If terrorist acts or military actions were to result in substantial damage to our facilities, our business activities would be disrupted since, with respect to most products, we would need to obtain prior regulatory agency approval for a change in manufacturing site. In addition, our insurance may not adequately compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business.
Perrigo Company plc- Item 1A
Risk Factors
The U.S. Department of State and other governments have at times issued advisories regarding travel to certain countries in which we do business. As a result, regulatory agencies have, at various times, curtailed or prohibited their inspectors from traveling to inspect facilities. If these inspectors are unable to inspect our facilities, the regulatory agencies could withhold approval for new products intended to be produced at those facilities.
Our international operations may be subject to interruption due to travel restrictions, war, terrorist acts, and other armed conflicts. Also, further threats of armed hostilities in certain countries could limit or disrupt markets and our operations, including disruptions resulting from the cancellation of contracts or the loss of assets. These events could have a material adverse effect on our international business operations.
While the challenging global economic environment has not had a material impact on our liquidity or capital resources, there can be no assurance that possible future changes in global financial markets and global economic conditions will not affect our liquidity or capital resources, impact our ability to obtain financing, or decrease the value of our assets.
The challenging economic conditions have also impacted the movements in exchange rates, which have experienced significant recent volatility. Uncertainty regarding the future growth rates between countries, the influence of central bank actions, and the changing political environment globally may contribute to continued high levels of exchange rate volatility, which could have an adverse impact on our results.
| • | Our customers could be adversely impacted if U.S. economic conditions worsen. Our CSCA segment does not advertise our store brand products like national brand companies and thus is largely dependent on retailer promotional activities to drive sales volume and increase market share.If our customers do not have the ability to invest in store brand promotional activities, our sales may suffer. Additionally, while we actively review the credit worthiness of our customers and suppliers, we cannot fully predict to what extent they may be negatively impacted by slowing economic growth. |
Risk Factors
The international scope of our business exposes us to risks associated with foreign exchange rates.
We report our financial results in U.S. dollars. However, a significant portion of our net sales, assets, indebtedness and other liabilities, and costs are denominated in foreign currencies. These currencies include, among others, the euro,Euro, Indian rupee, British pound, Canadian dollar, Israeli shekel, Australian dollar, and Mexican peso. The addition of Omega,Our Branded Consumer Self-care business is a euro-denominated business that represents a significant portion of our net sales, andnet earnings and a substantial portion of our net assets, has significantly increased our exposure to changes in the euro/U.S. dollar exchange rate. Approximately 34% of Omega’s sales are in other foreign currencies, with the majority of the product costs for these markets denominated in euros.assets.
In addition, several emerging market economies are particularly vulnerable to the impact of rising interest rates, inflationary pressures, weaker oil and other commodity prices, and large external deficits. While some of
Litigation and Insurance Risks
We are or may become involved in lawsuits and may experience unfavorable outcomes of such proceedings.
We may become involved in lawsuits arising from a wide variety of commercial, manufacturing, development, marketing, sales and other business-related matters, including, but not limited to, competitive issues, pricing, contract issues, intellectual property matters, false advertising, unfair competition, taxation matters, workers' compensation, product quality/recall, environmental remediation, securities law, disclosure, and regulatory issues. Litigation is unpredictable and can be costly. We intend to vigorously defend against any lawsuits, however, we cannot predict how the cases will be resolved. Adverse results in the cases could result in substantial monetary judgments. No assurance can be made that litigation will not have a material adverse effect on our financial position or results of operations in the future (refer to Item 8. Note 1617 for more information on specific ongoing litigation)).
We may be subject to liability if our products violate applicable laws or regulations in the jurisdictions where our products are distributed. The successful assertion of product liability or other product-related claims against us could result in potentially significant monetary damages, and we could incur substantial legal expenses. Even if a product liability or consumer fraud claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation may suffer.
| • | We may face environmental exposures including, for example, those relating to discharges from and materials handled as part of our operations, the remediation of soil and groundwater contaminated by hazardous substances or wastes, and the health and safety of our employees. |
Our CHCI segmentCSCI and CSCA segments regularly makesmake advertising claims regarding the effectiveness of itstheir products, which we are responsible for defending. An unsuccessful defense of a product-related claimsclaim could result in potentially significant monetary damages and substantial legal expenses. Even if a claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation could suffer.
Additionally, we may beare the target of claims asserting violations of securities fraud and derivative actions, or other litigation proceedings, and may be in the future.
Perrigo Company plc- Item 1A
Risk Factors
Increased scrutiny on pricing practices and competition in the pharmaceutical industry, including antitrust enforcement activity by government agencies and class action litigation, may have an adverse impact on our business and results of operations.
There has been increased scrutiny regarding sales, marketing, and pricing practices in the pharmaceutical industry, from both government agencies and the media, including allegations of “price gouging” and/or collusion. This includes recent U.S. Congressional inquiries and hearings in connection with the investigation of specific price increases by several pharmaceutical companies, proposed and enacted legislation seeking greater transparency in drug pricing, and criminal antitrust investigations regarding drug pricing. U.S. federalpricing, multiple civil antitrust litigations initiated by governmental and state prosecutors have issued subpoenas to a number ofprivate plaintiffs against pharmaceutical companies seeking information about their drug pricing practices,manufacturers and several class action lawsuits have been filed that allege price-fixing with respect to various pharmaceutical products. In December 2016, the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) filed criminal charges against two former executives from a competitor of the Company for their roles in conspiracies to fix prices, rig bidsindividuals, and allocate customers for certain generic drugs.media reports.
On May 2, 2017, we disclosed that search warrants were executed at a number ofseveral Perrigo facilities and other locations in connection with the Antitrust Division’s ongoing investigation related to drug pricing in the pharmaceutical industry. Although no charges have been brought to date against Perrigo or any of our current employees (or, to the best of our knowledge, former employees), we take the investigation very seriously.
If criminal antitrust charges are filed involving Perrigo, we would incur substantial litigation and other costs, and could face substantial monetary penalties, injunctive relief, negative publicity and damage to our reputation. Regardless of the ultimate outcome, responding to those charges would divert management’s time and attention and could impair our operations. Further, we cannot predict whether legislative or regulatory changes may result from the ongoing public scrutiny of our industry, what the nature of any such changes might be, or what impact they may have on Perrigo. Any of these developments could have a material adverse impact on our business, results of operations, and reputation. While we intend to defend these lawsuits vigorously, any adverse decision could have a material adverse impact on our business, results of operations and reputation.
We are cooperating with the government’s investigation and are committed to operating our business in compliance with all applicable laws and regulations and the highest standards of ethical conduct. We do not condone, and will not countenance, any violation of these standards by our employees, agents, and business partners.
In addition, we have been named as a co-defendant with certain other generic pharmaceutical manufacturers in a number of class action lawsuits alleging that we engaged in anti-competitive behavior to fix or raise the prices of certain drugs starting, in some instances, as early as June 2013 (refer to Item 8. Note 17). While we intend to defend these lawsuits vigorously, any adverse decision could have a material adverse impact on our business, results of operations and reputation.
Publishing earnings guidance subjects us to risks, including increased stock volatility, that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to a number ofseveral risks. Actual results may vary from the guidance we provide investors from time to time, such that our stock price may decline following, among other things, any earnings release or guidance that does not meet market expectations.
It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. We have been in the past, are currently, and may be in the future, named in these types of lawsuits. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments, which could have a material impact on the Company.
Third-party patents and other intellectual property rights may limit our ability to bring new products to market and may subject us to potential legal liability, causing us to incur significant costs.
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of substantial litigation in the pharmaceutical industry.
Perrigo Company plc- Item 1A
Risk Factors
| • | As a manufacturer of generic pharmaceutical products, the ability of our CSCA, CSCI, and RX segments to bring new products to market is often limited by third-party patents or proprietary rights and regulatory exclusivity periods awarded on products. Launching new products prior to resolution of intellectual property issues may result in us incurring legal liability if the related litigation is later resolved against us. The cost and time for us to develop prescription and Rx-to-OTC switch products is significantly greater than the rest of the new products that we introduce. Any failure to bring new products to market in a timely manner could cause us to lose market share, and our operating results could suffer. |
We could have to defend against charges that we violated patents or proprietary rights of third parties. This could require us to incur substantial expense and could divert significant effort of our technical and management personnel. If we are found to have infringed on the rights of others, we could lose our right to develop or manufacture some products or could be required to pay monetary damages or royalties to license proprietary rights from third parties. Additionally, if we choose to settle a dispute through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include ongoing royalties. An adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a number of our products.
| • | At times, our CSCA or RX segments may seek approval to market drug products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable or would not be infringed by our products. In these cases, we may face significant patent litigation. Depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic pharmaceutical product while litigation is pending, before any court decision, or while an appeal of a lower court decision is pending, known as an "at risk" launch. The risk involved in an "at risk" launch can be substantial because, if a patent holder ultimately prevails, the remedies available to the patent holder may include, among other things, damages measured by the profits lost by the holder, which are often significantly higher than the profits we make from selling the generic version of the product. By electing to proceed in this manner, we could face substantial damages if we receive an adverse final court decision. In the case where a patent holder is able to prove that our infringement was "willful" or "exceptional," under applicable law, the patent holder may be awarded up to three times the amount of its actual damages or we may be required to pay attorneys’ fees. |
The success of certain of our products depends on the effectiveness of measures we take to protect our intellectual property rights and patents.
If we fail to adequately protect our intellectual property, competitors may manufacture and market similar products.
We have been issued patents covering certain of our products, and we have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries. Any existing or future patents issued to or licensed by us may not provide us with any significant competitive advantages for our products or may even be challenged, invalidated, or circumvented by competitors. In addition, patent rights may not prevent our competitors from developing, using, or commercializing non-infringing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented proprietary know-how, and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees, and consultants. If these agreements are breached, we may not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, trade secrets and proprietary technology may otherwise become known or be independently developed by competitors or, if patents are not issued with respect to products arising from research, we may not be able to maintain the value of such intellectual property rights.
Significant increases in the cost or decreases in the availability of the insurance we maintain could adversely impact our financial condition.
To protect the Company against various potential liabilities, we maintain a variety of insurance programs, including property, general, and product, and directors' and officers' liability. We may reevaluate and change the types and levels of insurance coverage that we purchase. We are self-insured when insurance is not available or not available at reasonable premiums. Risks associated with insurance plans include:
Perrigo Company plc- Item 1A
Risk Factors
Insurance costs could increase significantly, or the availability of insurance may decrease, either of which could adversely impact our financial condition;
Deductible or retention amounts could increase, or our coverage could be reduced in the future and to the extent losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we maintained; Insurance may not be available to us at an economically reasonable cost or our insurance may not adequately cover our liability in connection with claims brought against us; and |
As our business inherently exposes us to claims, for injuries allegedly resulting from the use of our products, we may become subject to claims for which we are not adequately insured. Unanticipated payment of a large claim may have a material adverse effect on our business.
Tax Related Risks
The resolution of uncertain tax positions, including the Notices of Proposed Adjustments and Notice of Assessment, could be unfavorable, which could have an adverse effect on our business.
Although we believe that our tax estimates are reasonable and that our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audit or any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments.
We are currently involved in several audits and adjustment-related disputes, including related litigation. This includes litigation in the United States District Court for the Western District of Michigan regarding our fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012. The United States District Court for the Western District of Michigan has scheduled a trial date in late May 2020 in response to our complaint filed on August 15, 2017 to recover $163.6 million of Federal income tax, penalties and interest assessed and collected by the IRS. Additionally, the IRS has proposed adjustments regarding the deductibility of interest for the years ended June 29, 2013, June 28, 2014, and June 27, 2015 and the IRS has proposed adjustments regarding litigation costs and transfer pricing positions for Athena Neuroscience, Inc. ("Athena"), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012 and December 31, 2013. We are also involved in litigation with Irish Revenue for the years ended December 31, 2012 and December 31, 2013.
On August 22, 2019, we received a draft NOPA from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms'-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.
Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team’s analyses
Perrigo Company plc- Item 1A
Risk Factors
and conclusions were both factually and legally misguided. Based on discussions with the IRS, we had believed that the IRS staff would take our submission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA.
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena’s in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation.
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners ("Irish Revenue") for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before the Tax Appeals Commission.
We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our tax reserves. We believe that, based on a review of the relevant facts and circumstances, this matter will not result in a material impact on our consolidated financial position, results of operations or cash flows. However, while we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is ultimately resolved unfavorably it would have a material adverse impact on us, including on liquidity and capital resources. We will consider the financial statement impact of any additional facts as they become available.
In addition, going forward, uncertainty regarding the future outcome of tax disputes such as the NoA or draft or final NOPA may have an adverse impact on our strategy and the results of such tax disputes may have an adverse impact on our financial condition and liquidity.
At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable developments in or resolutions of matters such as those discussed above could, individually or in the aggregate, have a material impact on our Consolidated Financial Statements in future periods (refer to Item 8, Note 15 for further information related to uncertain tax positions and ongoing tax audits and Item 8. Note 17 for further information related to legal proceedings). In addition, an adverse result with respect to any of these matters could ultimately require the use of
Perrigo Company plc- Item 1A
Risk Factors
corporate assets to pay assessments and related interest, penalties or other amounts, and any such use of corporate assets would limit the assets available for other corporate purposes.
The U.S. Internal Revenue Service ("IRS") may not agree with the conclusion that we are treated as a foreign corporation for U.S. federal tax purposes.
Although we are incorporated in Ireland, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to section 7874 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). For U.S. federal tax purposes, a corporation generally is considered a tax resident in the jurisdiction of its organization or incorporation. Because we are an Irish incorporated entity, we would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes.
For Perrigo Company plc to be treated as a foreign corporation for U.S. federal tax purposes under section 7874 of the Code, either (i) the former stockholders of Perrigo Company must own (within the meaning of section 7874 of the Code) less than 80% (by both vote and value) of our stock by reason of holding shares in Perrigo Company (the "ownership test") as of the closing of the Elan acquisition or (ii) we must have substantial business activities in Ireland after the Elan acquisition (taking into account the activities of our expanded affiliated group).
Upon our acquisition of Elan, Perrigo Company stockholders held 71% (by both vote and value) of our shares. As a result, we believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, we cannot assure that the IRS will agree with our position that the ownership test is satisfied. There is limited guidance regarding the section 7874 provisions, including the application of the ownership test. An unfavorable determination on Perrigo Company plc’s treatment as a foreign corporation under section 7874 of the Code could have a material impact on our consolidated financial statementsConsolidated Financial Statements in future periods.
Based on the limited guidance available, we currently expect that Section 7874 of the Code likely will limit our and our U.S. affiliates’ ability to use their U.S. tax attributes, such as net operating losses, to offset certain U.S. taxable income, if any, generated by the Elan acquisition or certain specified transactions for a period of time following the Elan acquisition (refer to Item 8,8. Note 1415).
Changes to tax laws could have a material adverse effect on our results of operations and the ability to utilize cash in a tax efficient manner.
We believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, any of the following could adversely affect our status as a foreign corporation for U.S. federal tax purposes:
Changes to the inversion rules in section 7874 of the Code, the IRS Treasury regulations promulgated thereunder, or other IRS guidance; and
Legislative proposals aimed at expanding the scope of U.S. corporate tax residence.
The Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles relating to Base Erosion and Profit Shifting ("BEPS"). These changes are being adopted and implemented by many of the countries in which we do business and may increase our taxestax expense in these countries. In addition, the European Commission has launched several initiatives to implement BEPS actions including an anti-tax avoidance directive ("ATADI & II") and having a common (consolidated) corporate tax base. It is unclear at present if and how these initiatives will beFor example, Ireland implemented "controlled foreign corporation legislation" effective January 1, 2019 as required by the EU countries. Specifically, Ireland is embarking on a consultation process to implement the ATAD & II directivesAnti-Tax Avoidance Directive ("ATAD") and BEPS related measures. The shapeeffective January 1, 2020 has implemented "anti-hybrid legislation." Such OECD initiatives, changes
Perrigo Company plc- Item 1A
Risk Factors
in domestic legislation, introduction of this reform may adversely impact our consolidated effective tax rate.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”).Act. The U.S. Tax Act includes a number ofseveral significant changes to existing U.S. tax laws that impact us. These changes include a corporate income tax rate reduction from 35% to 21%, full expensing of fixed assets placed in service in 2018 and the elimination or reduction of certain U.S. deductions and credits, including limitations on the deductibility of interest expense and executive compensation. The U.S. Tax Act also transitions international taxation from a worldwide system to a modified territorial system. This modified territorial system includes, among other items, base erosion prevention measures which have the effect of subjecting certain earnings of our U.S. owned foreign corporations to U.S. taxation as global intangible low-taxed income (“GILTI”) and the establishment of a minimum tax on certain payments from our U.S. subsidiaries to related foreign persons as base erosion and anti-abuse tax (“BEAT”). These changes arebecame effective beginning in 2018. The U.S. Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated U.S. owned foreign
corporations’ previously untaxed foreign earnings (“Transition Toll Tax”). The Transition Toll Tax willcan be paid over an eight-year period starting in 2018 and will not accrue interest. Based on the 2017 U.S. federal income tax return filed by the Company, the Transition Toll Tax was paid in full with the 2017 U.S. federal income tax return. During 2018, Treasury and the IRS issued various forms of guidance, including notices of proposed rule making and proposed Treasury regulations, implementing and clarifying aspects of the U.S. Tax Act and other related topics, such as:
Transition Toll Tax;
BEAT;
GILTI;
Foreign tax credit computations;
The full expensing of fixed assets placed in service in 2018;
Interest expense limitations under Section 163(j);
Deductibility of interest and/or royalty payments made by U.S. corporate taxpayers to foreign related parties in so-called “hybrid mismatch” arrangements under Section 267A; and
The limitation of deductions for key executive compensation as determined under Section 162(m).
During the year ended December 31, 2018, we considered and evaluated Treasury and IRS guidance issued as described above and reflected certain changes in our income tax provision for 2018. In 2019, Treasury and the IRS issued final tax regulations (“Final Regulations”) on certain code sections that were introduced by, or changed as a result of, the U.S. Tax Act. The Final Regulations issued in 2019 did not result in material changes to the tax effect recorded in prior periods when proposed regulations were issued. We will continue to record the tax effects of any further proposed regulations in the quarters in which they are issued.
Our preliminary estimate of the impact of the U.S. Tax Act (including the Transition Toll Tax) iswas recorded as of December 31, 2017 and was subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the U.S. Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain U.S. owned foreign subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the U.S. Tax Act may requirerequired further adjustments and changes in our 2017 estimates, which coulddid not have a material adverse effect on our business, results of operations or financial conditions. The final determination of the impact of the U.S. Tax Act (including the Transition Toll Tax) will bewas completed in 2018, as additional information becomes available, but no later than one year from the enactment of the U.S. Tax Actrequired by SAB 118 (refer to Item 8, Note 1415 for further information related to the U.S. Tax Act)).
Any of these changes could have a prospective or retroactive application to us, our shareholders, and affiliates, and could adversely affect us by changing our effective tax rate and limiting our ability to utilize cash in a tax efficient manner.
Perrigo Company plc- Item 1A
Risk Factors
Our effective tax rate or cash tax payment requirements may change in the future, which could adversely impact our future results from operations.
A number of factors may adversely impact our future effective tax ratesrate or cash tax payment requirements, which may impact our future results and cash flows from operations (refer toItem 8.8, Note 1415for further information related to Income Taxes)). These factors include, but are not limited to:
Changes to tax laws or the interpretation of such tax laws (including additional proposals for fundamental international tax reform)reform in a number of jurisdictions globally);
Income tax rate changes by governments;
The jurisdictions in which our profits are determined to be earned and taxed;
Changes in the valuation of our deferred tax assets and liabilities;
Adjustments to estimated taxes upon finalization of various tax returns;
Adjustments to our interpretation of transfer pricing standards, treatment or characterization of intercompany transactions, changes in available tax credits, grants and other incentives;
Changes in stock-based compensation expense;
Changes in U.S. generally accepted accounting principles;
Expiration or the inability to renew tax rulings or tax holiday incentives; and
Divestitures of current operations; andoperations.
Our indebtedness could adversely affect our ability to implement our strategic initiatives.
We anticipate that cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities will substantially fund working capital and capital expenditures. Our business requires continuous capital investments, and there can be no assurance that financial capital will always be available on favorable terms or at all. Additionally, our leverage and debt service obligations could adversely affect the business. At December 31, 2017,2019, our total indebtedness outstanding was $3.3$3.4 billion.
Our senior credit facilities, the agreements governing our senior notes, and agreements governing our other indebtedness contain a number of restrictions and covenants that limit our ability to make distributions or other payments to our investors and creditors unless certain financial tests or other criteria are satisfied.
We also must comply with certain specified financial ratios and tests. These restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities, such as acquisitions. If we do not comply with the covenants and restrictions contained in our senior credit facilities, agreements governing our senior notes, and agreements governing our other indebtedness, we could be in default under those agreements, and the debt, together with accrued interest, could then be declared immediately due and payable.
Any default under our senior credit facilities or agreements governing our senior notes or other indebtedness could lead to an acceleration of debt under other debt instruments that contain cross-acceleration or cross-default provisions. If our indebtedness is accelerated, there can be no assurance that we would be able to repay or refinance our debt or obtain sufficient new financing.
Downgrades to our credit ratings may limit our access to capital and materially increase borrowing costs on current or future financing, including via trade payables with vendors. Customers' inclination to purchase goods from us may also be affected by the publicity associated with deterioration of our credit ratings.
| • | There are various maturity dates associated with our credit facilities, senior notes, and other debt facilities. There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of our indebtedness. Further, there is no assurance that future refinancing or renegotiation of our senior credit facilities, senior notes or other debt facilities, or additional agreements will not have materially different or more stringent terms (refer toItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). |
Perrigo Company plc- Item 1A
Risk Factors
We cannot guarantee that we will buy back our ordinary shares pursuant to our announced share repurchase plan or that our share repurchase plan will enhance long-term shareholder value.
Following the expiration of our 2015 share repurchase plan authorization (the "2015 Authorization"), in October 2015,2018 our Board of Directors authorized a $2.0up to $1.0 billion three-yearof share repurchases with no expiration date (the "2018 Authorization"), subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase plan. During the three months endedprogram. Through December 31, 2015,2018, we repurchased a total of 7.8 million ordinary shares through the plan totaling $500.0 million. During 2016, we did not purchase any shares in the open market. During 2017, we repurchased $191.5 million worth of shares.prior 2015 Authorization. The specific timing and amount of buybacks under the 2018 Authorization, if any, will depend upon several factors, including market and business conditions, the trading price of our ordinary shares, and the nature of other investment opportunities.opportunities and the availability of distributable reserves of Perrigo Company plc. Buybacks of our ordinary shares pursuant to our share repurchase plan could affect the market price of our ordinary shares or increase their volatility. Additionally, our share repurchase plan could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although our share repurchase plan is intended to enhance long-term shareholder value, there is no assurance that it will do so, and short-term share price fluctuations could reduce the plan’s effectiveness.
Any additional shares we may issue could dilute your ownership in the Company.
Under Irish law, our authorized share capital can be increased by an ordinary resolution of our shareholders, and the directors may issue new ordinary or preferred shares up to a maximum amount equal to the authorized but unissued share capital, without shareholder approval, once authorized to do so by the articles of association or by an ordinary resolution of our shareholders.
Subject to specified exceptions, Irish law grants statutory preemption rights to existing shareholders to subscribe for new issuances of shares for cash, but allows shareholders to authorize the waiver of the statutory preemption rights either in our articles of association or by way of a special resolution withresolution. Such disapplication of these preemption rights can either be generally applicable or be in respect to anyof a particular allotment of shares.
We are incorporated in Ireland; Irish law differs from the laws in effect in the United States and may afford less protection to, or otherwise adversely affect, our shareholders.
As an Irish company, we are governed by the Irish Companies Act 2014 (the "Act"). The Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits, and indemnification of directors.
Under Irish law, the duties of directors and officers of a company are generally owed to the company only. As a result, shareholders of Irish companies do not have the right to bring an action against the directors or officers of a company, except in limited circumstances.
Depending on the circumstances, shareholders may be subject to different or additional tax consequences under Irish law as a result of the acquisition, ownership and/or disposition of ordinary shares, including, but not limited to, Irish stamp duty, dividend withholding tax, Irish income tax, and capital acquisitions tax.
Perrigo Company plc- Item 1A
Risk Factors
There is no treaty between Ireland and the U.S. providing for the reciprocal enforcement of foreign judgments. Before a foreign judgment would be deemed enforceable in Ireland, the judgment must be (i) for a definite sum, (ii) provided by a court of competent jurisdiction and be for a(iii) final and conclusive sum.conclusive. An Irish courtHigh Court may exercise its right to refuse to recognize and enforce a foreign judgment if the foreign judgment was obtained by fraud, if it violated Irish public policy, if it is in breach of natural justice, or if it is irreconcilable with an earlier judgment.
An Irish courtHigh Court may stay proceedings if concurrent proceedings are being brought elsewhere. Judgments of U.S. courts of liabilities predicated upon U.S. federal securities laws may not be enforced by Irish courtsHigh Courts if deemed to be contrary to public policy in Ireland.
Irish law differs from the laws in effect in the U.S. with respect to defending unwanted takeover proposals and may give our Board of Directors less ability to control negotiations with hostile offerors.
We are subject to the Irish Takeover Panel Act, 1997, Takeover Rules, 2013. Under those Irish Takeover Rules, the Board of Directors is not permitted to take any action that might frustrate an offer for our ordinary shares once the Board of Directors has received an approach that may lead to an offer or has reason to believe that such an offer is or may be imminent, subject to certain exceptions. Potentially frustrating actions such as (i) the issuance of ordinary shares, options or convertible securities, (ii) material acquisitions or disposals, (iii) entering into contracts other than in the ordinary course of business, or (iv) any action, other than seeking alternative offers, which may result in frustration of an offer, are prohibited during the course of an offer or at any earlier time during which the Board of Directors has reason to believe an offer is or may be imminent. These provisions may give the Board of Directors less ability to control negotiations with hostile offerors and protect the interests of holders of ordinary shares than would be the case for a corporation incorporated in a jurisdiction of the United States.
We may be limited in our ability to pay dividends or repurchase shares in the future.
A number of factors may limit our ability to pay dividends in the future, including:
Our ability to receive cash dividends and distributions from our subsidiaries;
Compliance with applicable laws and debt covenants; and
Our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant.relevant; and
The availability of Perrigo Company plc's distributable reserves, being profits of the company available for distribution to shareholders.
Under Irish law, distributable reserves are the accumulated realized profits so far as not previously utilized by distribution or capitalization, less accumulated realized losses so far as not previously written off in a reduction or a reorganization of capital duly made. In addition, no distribution or dividend may be made if, at the time of the distribution or dividend, Perrigo Company plc's net assets are not, or would not be after giving effect to such distribution or dividend, equal to, or in excess of, the aggregate of Perrigo Company plc's called-up share capital plus undistributable reserves.
While we currently expect to continue paying dividends, significant changes in our business or financial condition such as asset impairments, sustained operating losses and the selling of assets, could impact the amount of distributable reserves available to us. We could seek to create additional distributable reserves through a reduction in Perrigo Company plc's share premium, which would require 75% shareholder approval and the approval of the Irish High Court. The Irish High Court’s approval is a matter for the discretion of the court, and there can be no assurances that such approval would be obtained. In the event that additional distributable reserves are not created in this way, dividends, share repurchases or other distributions would generally not be permitted under Irish law until such time as Perrigo Company plc has created sufficient distributable reserves in our audited statutory financial statements as a result of its business activities.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
Our world headquarters is located in Dublin, Ireland, and our North American base of operations is located in Allegan, Michigan. We manufacture products at 2822 worldwide locations and have R&D, logistics, and office support facilities in many of the regions in which we operate. We own approximately 72%77% of our facilities and lease the remainder. Our primary facilities by geographic area were as follows at December 31, 2017:2019:
| Country | Number of Facilities | Segment(s) Supported | ||
| Ireland | ||||
| United States | ||||
| Mexico | ||||
| United Kingdom | ||||
| France | 6 | |||
| Australia | 4 | CSCI | ||
| Belgium | 4 | |||
| Austria | ||||
| 3 | ||||
| Israel | 3 | |||
| India | ||||
| Germany | 2 | |||
We believe that our production facilities are adequate to support the business, and our property and equipment are well maintained. Our manufacturing plants are suitable for their intended purposes and have capacities for current and near term projected needs of our existing products. As previously announced, we are making strategic investments in certain of our manufacturing plants to enhance our manufacturing capabilities.
| ITEM 3. | LEGAL PROCEEDINGS |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
Perrigo Company plc - Additional Item
Executive Officers
ADDITIONAL ITEM. INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages and positions as of February 23, 201821, 2020 were:
| Title and Business Experience | Age | |||
| Svend Andersen | Mr. Andersen was named Executive Vice President and President, Consumer | 58 | ||
| James E. Dillard III | James E. Dillard III was named Executive Vice President and Chief Scientific Officer in January 2019. Mr. Dillard joined Perrigo from Altria Group, Inc., where he served as Senior Vice President, Research, Development and Sciences and Chief Innovation Officer from January 2009 to May 2018. During his tenure with Altria Group, Mr. Dillard led the creation of the Regulatory Affairs function in 2009 and also served as Chief Innovation Officer for Altria Client Services and Senior Vice President of Research, Development & Regulatory Affairs for Altria Group. He held science and technology leadership roles with U.S. Smokeless Tobacco Company, an Altria Group Inc. operating company, from 2001 to 2009. Mr. Dillard worked for the U.S. Food and Drug Administration between 1987 and 2001 as Director of the Division of Cardiovascular and Respiratory Devices, as well as in various leadership roles in the Center for Devices and Radiological Health and the Office of Device Evaluation. | 56 | ||
| Thomas M. Farrington | Mr. Farrington was named Executive Vice President and Chief Information Officer in November 2015. He formerly served as Senior Vice President and Chief Information Officer from October 2006 to November 2015. | |||
| Ronald C. Janish | Mr. Janish was named Chief Transformation Officer in January 2019 and Executive Vice President of Global Operations and Supply Chain in October 2015. He served as Senior Vice President of International and Rx Operations from 2012 until 2015 and as Managing Director of Perrigo’s Australian operations from 2010 to 2012. Previously, he held Senior Vice President roles for Perrigo in International Market Development, China Business Development and Global Procurement. | |||
| Murray S. Kessler | Mr. Kessler was appointed President, Chief Executive Officer and Board Member of Perrigo Company plc, effective October 8, 2018. Before joining Perrigo, Mr. Kessler served as the Chairman of the Board of Directors, President and CEO of Lorillard, Inc. (2010-2015). He served as Vice Chair of Altria, Inc. (2009) and President and CEO of UST, Inc. (2000-2009), a wholly owned subsidiary. Previous to his time at UST, Mr. Kessler had over 18 years of consumer packaged goods experience with companies including Vlasic Foods International, Campbell Soup and The Clorox Company. Since 2015, Mr. Kessler has served as voluntary President of the United States Equestrian Federation, a non-profit national governing body. | 60 | ||
| Todd W. Kingma | Mr. Kingma was named Executive Vice President, General Counsel and Secretary in May 2006. He served as Vice President, General Counsel and Secretary from August 2003 to May 2006. | |||
| Sharon Kochan | Mr. Kochan was named Executive Vice President and President, RX Pharmaceuticals in October 2018. He served as Executive Vice President and President, Branded Consumer Healthcare | |||
| Jeffrey R. Needham | Mr. Needham was named Executive Vice President and President of Consumer | |||
| Grainne Quinn | ||||
Perrigo Company plc - Additional Item
Executive Officers
| Title and Business Experience | Age | |||
| Raymond P. Silcock | Mr. | |||
| Mr. | ||||
| 51 | ||||
PART II.
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Prior to June 6, 2013, our common equity traded on the Nasdaq Global Select Market under the symbol PRGO. Since June 6, 2013, our common equity has traded on the New York Stock Exchange ("NYSE") under the symbol PRGO. In association with the acquisition of Agis Industries (1983) Ltd., our common equity has been trading on the Tel Aviv Stock Exchange ("TASE") since March 16, 2005.2005 under the same symbol. As of February 23, 2018,21, 2020, there were 1,4981,435 record holders of our ordinary shares.
| Year Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| High | Low | High | Low | High | Low | ||||||||||||||||||
| First quarter | $ | 87.48 | $ | 66.29 | $ | 152.36 | $ | 122.62 | $ | 198.42 | $ | 158.35 | |||||||||||
| Second quarter | $ | 77.74 | $ | 65.47 | $ | 133.53 | $ | 84.85 | $ | 167.92 | $ | 140.40 | |||||||||||
| Third quarter | $ | 89.87 | $ | 63.68 | $ | 99.14 | $ | 82.50 | N/A | N/A | |||||||||||||
| Fourth quarter | $ | 91.73 | $ | 79.70 | $ | 97.17 | $ | 79.72 | N/A | N/A | |||||||||||||
The graph below shows a comparison of our cumulative total return with the cumulative total returns for the S&P 500 Index and the S&P Pharmaceuticals Index. The graph assumes an investment of $100 at the beginning of the period and the reinvestment of any dividends. Information in the graph is presented for the years ended December 31, 20122014 through December 31, 2017.2019.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PERRIGO COMPANY PLC**, THE S&P 500 INDEX, AND THE S&P PHARMACEUTICALS INDEX
| 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | |
| Perrigo Company plc | $100.00 | $147.94 | $161.60 | $140.30 | $81.18 | $85.72 |
| S&P 500 | $100.00 | $132.39 | $150.51 | $152.59 | $170.84 | $208.14 |
| S&P Pharmaceuticals | $100.00 | $135.23 | $165.27 | $174.84 | $172.10 | $193.74 |
| * | $100 invested on December 31, |
** Perrigo Company prior to December 31, 2013. Perrigo Company plc beginning December 18, 2013. |
In October 2015, the Board of Directors approved a three-year share repurchase plan of up to $2.0 billion. Following the expiration of our 2015 share repurchase plan authorization in October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares under the share repurchase plan during the three monthsyear ended December 31, 20172019. During the year ended December 31, 2018, we repurchased 5.1 million ordinary shares at an average repurchase price of $77.93 per share, for a total of $400.0 million. During the year ended December 31, 2017, we repurchased 2.7 million ordinary shares at an average repurchase price of $71.72 per share, for a total of $191.5 million. We did not repurchase any shares under the share repurchase plan during the year ended December 31, 2016. During the six months ended December 31, 2015, we repurchased 3.3 million ordinary shares at an average repurchase price of $151.59 per share, for a total of $500.0 million.
Perrigo Company plc - Item 6
| ITEM 6. | SELECTED FINANCIAL DATA |
The Consolidated Statements of Operations data set forth below with respect to the years ended December 31, 20172019, December 31, 2018, and December 31, 2016, the six months ended December 31, 2015 and December 27, 2014, and the year ended June 27, 2015,2017, and the Consolidated Balance Sheet data at December 31, 2017, December 31, 2016,2019 and December 31, 20152018 are derived from and are qualified by reference to the audited consolidated financial statements included in Item 8 of this report and should be read in conjunction with those financial statements and notes. The Consolidated Statements of Operations data set forth below with respect to the year ended June 28,December 31, 2016 and the six months ended December 31, 2015 and December 27, 2014 and the Consolidated Balance Sheet data at June 27,December 31, 2017, December 31, 2016, December 31, 2015, and June 28,December 27, 2014 are derived from audited consolidated financial statements not included in this report.
| Year Ended | Six Months Ended | Year Ended | Year Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | December 31, 2017 | December 31, 2016(1) | December 31, 2015(2) | December 27, 2014(3) | June 27, 2015(4) | June 28, 2014(5) | December 31, 2019(1) | December 31, 2018 | December 31, 2017 | December 31, 2016(2) | December 31, 2015(3) | December 27, 2014(4) | ||||||||||||||||||||||||||||||||||
| Statements of Operations Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 4,946.2 | $ | 5,280.6 | $ | 2,632.2 | $ | 1,844.7 | $ | 4,227.1 | $ | 3,914.1 | $ | 4,837.4 | $ | 4,731.7 | $ | 4,946.2 | $ | 5,280.6 | $ | 2,632.2 | $ | 1,844.7 | ||||||||||||||||||||||
| Cost of sales | 2,966.7 | 3,228.8 | 1,553.3 | 1,170.9 | 2,582.9 | 2,462.0 | 3,064.1 | 2,900.2 | 2,966.7 | 3,228.8 | 1,553.3 | 1,170.9 | ||||||||||||||||||||||||||||||||||
| Gross profit | 1,979.5 | 2,051.8 | 1,078.9 | 673.8 | 1,644.2 | 1,452.1 | 1,773.3 | 1,831.5 | 1,979.5 | 2,051.8 | 1,078.9 | 673.8 | ||||||||||||||||||||||||||||||||||
| Operating expenses | 1,381.3 | 4,051.5 | 1,011.3 | 384.1 | 971.7 | 880.7 | 1,568.5 | 1,595.0 | 1,381.3 | 4,051.5 | 1,011.3 | 384.1 | ||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 598.2 | $ | (1,999.7 | ) | $ | 67.6 | $ | 289.7 | $ | 672.5 | $ | 571.4 | $ | 204.8 | $ | 236.5 | $ | 598.2 | $ | (1,999.7 | ) | $ | 67.6 | $ | 289.7 | ||||||||||||||||||||
| Net income (loss) | $ | 119.6 | $ | (4,012.8 | ) | $ | 42.5 | $ | 180.6 | $ | 136.1 | $ | 232.8 | $ | 146.1 | $ | 131.0 | $ | 119.6 | $ | (4,012.8 | ) | $ | 42.5 | $ | 180.6 | ||||||||||||||||||||
| Diluted earnings from continuing operations per share | $ | 0.84 | $ | (28.01 | ) | $ | 0.29 | $ | 1.34 | $ | 0.97 | $ | 2.01 | |||||||||||||||||||||||||||||||||
| Diluted earnings (loss) from continuing operations per share | $ | 1.07 | $ | 0.95 | $ | 0.84 | $ | (28.01 | ) | $ | 0.29 | $ | 1.34 | |||||||||||||||||||||||||||||||||
| Dividends declared per share | $ | 0.64 | $ | 0.58 | $ | 0.25 | $ | 0.21 | $ | 0.46 | $ | 0.39 | $ | 0.82 | $ | 0.76 | $ | 0.64 | $ | 0.58 | $ | 0.25 | $ | 0.21 | ||||||||||||||||||||||
(1) | Includes the results of operations for assets acquired from Ranir Global Holdings, LLC for the six months ended December 31, 2019. |
| (2) | Includes the results of operations for assets acquired from Barr Laboratories, Inc. and assets acquired from Matawan Pharmaceuticals, LLC for the five months and eleven months and one week ended December 31, 2016, respectively. |
Includes the results of operations of Naturwohl and the GSK, ScarAway®, and Entocort® asset acquisitions for the two and a half months, three months, three months, and two weeks ended December 31, 2015, respectively. |
| Includes the results of operations for assets acquired from Lumara Health, Inc. for the two months ended December 27, 2014. |
| (in millions) | December 31, 2017 | December 31, 2016 | December 31, 2015 | December 27, 2014 | June 27, 2015 | June 28, 2014 | December 31, 2019 | December 31, 2018 | December 31, 2017 | December 31, 2016 | December 31, 2015 | December 27, 2014 | ||||||||||||||||||||||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 678.7 | $ | 622.3 | $ | 417.8 | $ | 3,596.1 | $ | 785.6 | $ | 799.5 | $ | 354.3 | $ | 551.1 | $ | 678.7 | $ | 622.3 | $ | 417.8 | $ | 3,596.1 | ||||||||||||||||||||||
| Total assets | 11,628.8 | 13,870.1 | $ | 19,349.6 | 16,508.4 | $ | 19,591.9 | $ | 13,879.1 | $ | 11,301.4 | $ | 10,983.4 | $ | 11,628.8 | $ | 13,870.1 | $ | 19,349.6 | $ | 16,508.4 | |||||||||||||||||||||||||
| Long-term debt, less current portion | 3,270.8 | 5,224.5 | 4,971.6 | 4,439.4 | 5,246.9 | 5,246.9 | $ | 3,365.8 | $ | 3,052.2 | $ | 3,270.8 | $ | 5,224.5 | $ | 4,971.6 | $ | 4,439.4 | ||||||||||||||||||||||||||||
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management's Discussion and Analysis ("MD&A") is intended to provide readers with an understanding of our financial condition, results of operations, and cash flows by focusing on changes in certain key measures from year to year. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes found in Item 8 of this report. See also "Cautionary Note Regarding Forward-Looking Statements."
Perrigo Company plc - Item 7
Executive Overview
EXECUTIVE OVERVIEW
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We are a leading global healthcare company, delivering valuededicated to our customers and consumersmaking lives better by providing bringing “Quality, Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business modelSelf-Care Products™” that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe weconsumers trust everywhere they are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market.sold. We are a leading provider of branded OTC products throughout Europe,over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and gels,nasal sprays.
Our vision is designed to support our shifting focus to our consumer branded and store brand portfolio and our global reach and the opportunities for growth we see ahead of us, while remaining loyal to our heritage. Our vision represents an evolution from healthcare to self-care, which takes advantage of a massive global trend and opens up a large number of adjacent growth opportunities. We define self-care as well as nasal spraysnot just treating disease or helping individuals feel better after taking a product, but also maintaining and injection ("extended topical") prescription drugs. We are headquarteredenhancing their overall health and wellness. In 2019, Perrigo’s management and Board of Directors launched a three-year strategy to transform the Company into a consumer self-care leader, consistent with our vision. Significant progress was made in Ireland,the first year of our transformation journey towards achieving the major components of management’s transformation strategy, which consists of: reconfiguring the portfolio, delivering on base plans, creating repeatable platforms for growth, driving organizational effectiveness and sell our products primarilycapabilities, increasing productivity, allocating capital and delivering consistent and sustainable results in North America and Europe, as well as in other markets, including Australia, Israel and China.line with consumer-packaged goods peers.
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to beginbegins on January 1 and endends on December 31 of each year. As a result of our change in yearWe end this report on Form 10-K discloses the results of our operations for:
Our Segments
During the three months ended March 30, 2019, we changed the composition of our operating and reporting segments. We moved our pharmaceuticals and diagnostic businesses in Israel from the Consumer Self-Care International segment to the Prescription Pharmaceuticals segment and we made certain adjustments to our allocations between segments. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company.
Our new reporting and operating segments are as follows:
| • | Consumer Self-Care Americas ("CSCA"), formerly Consumer Healthcare Americas, comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
| • | Consumer Self-Care International ("CSCI"),formerly Consumer Healthcare International, comprises our branded consumer self-care business primarily in Europe and Australia, our consumer-focused business in the United Kingdom and parts of Asia, and our liquid licensed products business in the United Kingdom. |
| • | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S. and our pharmaceuticals and diagnostic businesses in Israel, which were previously in our CSCI segment. |
For information on each segment, our business environment, and competitive landscape, refer to Item 1. Business - Our Segments. For results by segment and geographic locations see below "Segment Results" and Item 8. Note 192. See Item 1. Business for information on our business environment and competitive landscape.Note 20.
Perrigo Company plc - Item 7
Executive Overview
Strategy
Our strategy is to deliver make lives better by bringing "Quality, Affordable Healthcare ProductsSelf-Care Products™"® that consumers trust everywhere they are sold. We accomplish this by leveraging our global infrastructure to expand our product offerings, thereby providing new innovative products and product line extensions to existing consumers and servicing new healthcare consumers through entry into adjacent product categories or new markets.geographies. We accomplish this strategy by investing in and continually improving all aspects of our five strategic pillars:
High quality;
Superior customer service;
Leading innovation;
Best cost; and
Empowered people.people,
while remaining true to our three core values, Integrity - we do what is right; Respect - we demonstrate the value we hold for one another; and Responsibility - we hold ourselves accountable for our actions.
We utilize shared services and Research and Development ("R&D") centers of excellence in order to help ensure consistency in our processes around the world, and to maintain focus on our five strategic pillars.
We have grown rapidly in recent years through a combination of organic growth and targeted acquisitions. We continually reinvest in our R&D pipeline and work with partners as necessary to strive to be first-to-market with new products. Our organic growth has been and will continue to be driven by successful new product launches in the CHCA, CHCI,all our segments and RX segments.expansion in new channels like e-commerce. Over time, we expect to continue to grow inorganically through expansion into adjacent products, product categories, and channels, as well as potentially through entry into new geographic markets. We evaluate potential acquisition targets using a return on invested capital ("ROIC") metric.an internally developed 12-point scale, that is weighted towards accretive growth and correlated with shareholder value.
Competitive Advantage
Among other things, we believe the following give us a competitive advantage and provide value to our customers:
Leadership in first-to-market product development and product life cycle management;
Turn-key regulatory and promotional capabilities;
Management of supply chain complexity and utilizing economies of scale;
Quality and cost effectiveness throughout the supply chain creating a sustainable, low-cost network;
Deep understanding of consumer needs and customer strategies;
Industry leading e-commerce support; and
Expansive pan-European commercial infrastructure, brand-building capabilities, and a diverse product portfolio.
Perrigo Company plc - Item 7
Executive Overview
Product Categories
As we continue to transform to a consumer-focused, self-care company, we re-aligned our product categories in our CSCA and CSCI segments as of December 31, 2019. The re-alignment standardizes our categories and product level detail to provide consistency across segments. This transformative step will optimize the way in which management reports and evaluates our business (refer to Item 1. Business - Our Segments and Item 8. Note 2).
Recent Highlights
Year Ended December 31, 20172019
We previously announced a plan to separate our RX business, which, when completed, will enable us to focus on expanding our consumer-focused businesses. In 2019, we continued preparations related to our planned separation, which may include a possible sale, spin-off, merger or other form of separation. While we remain committed to transforming to a consumer-focused business, we have not committed to a specific date or form for the separation. In connection with the proposed separation, we have incurred significant preparation costs and will continue to incur costs that when completed will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on the final timing and structure of the transaction.
On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, which resulted in a pre-tax gain of $71.7 million recorded in Other (income) expense, net on the Consolidated Statements of Operations.
On July 1, 2019, we acquired 100% of the outstanding equity interest in Ranir Global Holdings, LLC ("Ranir"), a privately-held leading global supplier of private label and branded oral self-care products. After post-closing adjustments, total cash consideration paid was $747.7 million, net of $11.5 million cash acquired. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions.
Year Ended December 31, 2018
| • |
Perrigo Company plc - Item 7
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Financial Results
| Year Ended | |||||||||||
| (in millions) | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||
| Net sales | $ | 4,837.4 | $ | 4,731.7 | $ | 4,946.2 | |||||
| Gross profit | $ | 1,773.3 | $ | 1,831.5 | $ | 1,979.5 | |||||
| Gross profit % | 36.7 | % | 38.7 | % | 40.0 | % | |||||
| Operating income | $ | 204.8 | $ | 236.5 | $ | 598.2 | |||||
| Operating income % | 4.2 | % | 5.0 | % | 12.1 | % | |||||
| Six Months Ended | Year Ended | ||||||||||||||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2017 | ||||||||||||||
| Net sales | $ | 1,844.7 | $ | 2,632.2 | $ | 5,014.7 | $ | 5,280.6 | $ | 4,946.2 | |||||||||
| Gross profit | $ | 673.8 | $ | 1,078.9 | $ | 2,049.4 | $ | 2,051.8 | $ | 1,979.5 | |||||||||
| Gross profit % | 36.5 | % | 41.0 | % | 40.9 | % | 38.9 | % | 40.0 | % | |||||||||
| Operating expenses | $ | 384.1 | $ | 1,011.3 | $ | 1,599.0 | $ | 4,051.5 | $ | 1,381.3 | |||||||||
| Operating expenses % | 20.8 | % | 38.4 | % | 31.9 | % | 76.7 | % | 27.9 | % | |||||||||
| Operating income (loss) | $ | 289.7 | $ | 67.6 | $ | 450.4 | $ | (1,999.7 | ) | $ | 598.2 | ||||||||
| Operating income (loss) % | 15.7 | % | 2.6 | % | 9.0 | % | (37.9 | )% | 12.1 | % | |||||||||
| Change in financial assets | $ | (46.9 | ) | $ | (57.3 | ) | $ | (88.8 | ) | $ | 2,608.2 | $ | 24.9 | ||||||
| Interest and other, net | $ | 117.0 | $ | 115.1 | $ | 478.2 | $ | 239.3 | $ | 158.0 | |||||||||
| Loss on extinguishment of debt | $ | 9.6 | $ | 0.9 | $ | 1.8 | $ | 1.1 | $ | 135.2 | |||||||||
| Income tax expense (benefit) | $ | 29.4 | $ | (33.6 | ) | $ | 61.1 | $ | (835.5 | ) | $ | 160.5 | |||||||
| Net income (loss) | $ | 180.6 | $ | 42.5 | $ | (1.9 | ) | $ | (4,012.8 | ) | $ | 119.6 | |||||||
| * | Total net sales by geography is derived from the location of the entity that sells to a third party. |
Year Ended December 31, 2019 vs. December 31, 2018
Net sales increased $105.7 million, or 2%, due to:
$279.4 million, or a 6%, net increase due to new product sales of $230.5 million, an increase of $151.4 million due to our acquisition of Ranir, and an overall increase in demand for existing products, partially offset by normal levels of competition-driven pricing pressure primarily in our RX segment and a $59.0 million decrease due to discontinued products; partially offset by
$173.7 million decrease due to:
| ◦ | $86.4 million decrease due primarily to unfavorable Euro foreign currency translation; |
| ◦ | $50.2 million decrease due to our divested animal health business; |
| ◦ | $27.9 million decrease due to our exited infant foods business; and |
| ◦ | $9.2 million decrease due to the retail market withdrawal of Ranitidine products. |
Operating income decreased $31.7 million, or 13%, due to:
| • | $58.2 milliondecrease in gross profit, or a 200 basis point decrease in gross profit as a percentage of net sales, due primarily to normal levels of competition-driven pricing pressure in our RX segment, the retail market withdrawal of Ranitidine products and unfavorable product mix; partially offset by |
Perrigo Company plc - Item 7
Consolidated
$26.5 million decrease in operating expenses due primarily to:
| ◦ | $39.9 million decrease in impairment charges due primarily to the absence of $221.9 million in impairment charges related to animal health goodwill and intangible assets and certain in-process research and development ("IPR&D") taken in the prior year period; partially offset by $184.5 million in current year impairments primarily for our RX U.S. reporting unit goodwill and certain definite-lived intangible assets in our RX and CSCI segments; and |
| ◦ | $31.1 million decrease in R&D expenses primarily related to the absence of a $50.0 million upfront license fee payment to enter into a license agreement with Merck Sharp & Dohme Corp in the prior year period, partially offset by current year innovation investments and pre-commercialization R&D costs for generic albuterol sulfate inhalation aerosol, the generic version of ProAir® HFA; partially offset by |
| ◦ | $17.8 million increase due to the absence of an insurance recovery received in the prior year; and |
| ◦ | $20.6 million increase in selling and administrative expenses due primarily to restored employee incentive compensation, increased acquisition and integration-related charges due to the Ranir acquisition; partially offset by favorable Euro foreign currency translation. |
Year Ended December 31, 2018 vs. December 31, 2017
Net sales decreased $214.5 million, or 4%, due primarily to:
$159.3 million, or a 3%, net decrease due primarily to normal levels of competition-driven pricing pressure primarily in our RX segment, discontinued products of $66.4 million, and a decrease in volume in most segments, partially offset by $169.8 million increase due to new product sales; and
$55.2 million decrease due to:
| ◦ | $88.7 million decrease due to our divested Russian business and Israel API business; partially offset by |
| ◦ | $33.5 million increase due primarily to favorable Euro foreign currency translation. |
Operating income decreased $361.7 million, or 60%, due primarily to:
| • | $148.0 milliondecrease in gross profit, or a 130 basis point decrease in gross profit as a percentage of net sales, due primarily to pricing pressure in our CSCA and RX segments, unfavorable product mix, and operating variances and increased input costs; partially offset by favorable pricing and benefits from continued insourcing initiatives in our CSCI segment; and |
$213.7 million increase in operating expenses due primarily to:
| ◦ | $176.9 million increase in impairment charges related primarily to animal health goodwill and intangible assets in 2018; partially offset by 2017 impairment charges related to certain definite-lived intangible assets and IPR&D; |
| ◦ | $50.9 million increase in R&D expense primarily related to a $50.0 million upfront license fee payment to enter into a license agreement with Merck Sharp & Dohme Corp; |
| ◦ | $38.0 million increase due to the absence of a gain for the |
| ◦ | $32.4 million decrease in restructuring expense due primarily to the cost reduction initiatives and strategic organizational enhancements taken in 2017; and |
| ◦ | $17.8 million decrease due primarily to an insurance recovery. |
Internal Revenue Service Notices of Proposed Adjustments
On August 22, 2019, we received a draft Notice of Proposed Adjustment ("NOPA") from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in
Perrigo Company plc - Item 7
Consolidated
debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company, plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms’-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.
Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team's analyses and conclusions were both factually and legally misguided. Based on discussions with the IRS, we had believed that the IRS staff would take our financial resultssubmission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15).
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2017,2011, December 31, 2016,2012 and December 31, 2015,2013. The NOPA carries forward the six monthsIRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena’s in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15).
Irish Tax Appeals Commission Notice of Amended Assessment
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 31, 20152012 and December 27, 2014, and the years ended June 27, 2015 and June 28, 2014 are described below by reporting segment and line item. Refer31, 2013. The audit finding letter relates to the "Unallocated Expenses," "Interest, Othertax treatment of the 2013 sale of the Tysabri® intellectual property and Change in financialother assets (Consolidated)," and "Income Taxes (Consolidated)" sections below for discussions related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based
Perrigo Company plc - Item 7
Consolidated
on our expenses.
Impairments
Throughout the years ended December 31, 20172019, December 31, 2018, and December 31, 2016,2017, we identified impairment indicators for various assets across our different segments, and therefore, we performed impairment testing. Below is a summary of the impairment charges recorded by segment (in millions):
| Year Ended | ||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Definite-Lived Intangible Assets | Assets Held-For-Sale | IPR&D | Fixed Assets | Total | ||||||||||||||||
CHCA(1) | $ | — | $ | — | $ | — | $ | 4.5 | $ | 4.5 | ||||||||||
CHCI(2) | — | 3.7 | 1.1 | — | 4.8 | |||||||||||||||
RX(3) | 19.7 | — | 11.6 | 3.6 | 34.9 | |||||||||||||||
Other(4) | — | 3.3 | — | — | 3.3 | |||||||||||||||
| $ | 19.7 | $ | 7.0 | $ | 12.7 | $ | 8.1 | $ | 47.5 | |||||||||||
| Year Ended | |||||||||||||||
| December 31, 2019 | |||||||||||||||
| CSCA | CSCI(1) | RX(2) | Total | ||||||||||||
| Goodwill | $ | — | $ | — | $ | 109.2 | $ | 109.2 | |||||||
| Definite-lived intangible assets | — | 9.7 | 59.8 | 69.5 | |||||||||||
| IPR&D | 4.1 | 0.1 | 1.6 | 5.8 | |||||||||||
| $ | 4.1 | $ | 9.8 | $ | 170.6 | $ | 184.5 | ||||||||
(1) Relates primarily to an intangible asset for certain pain relief products that we license from a third party.
(2) Relates primarily to our RX U.S. reporting unit goodwill, and definite-lived intangible assets for our generic clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®), our Evamist® branded product, and a generic product.
| Year Ended | |||||||||||
| December 31, 2018 | |||||||||||
CSCA(1) | CSCI | Total | |||||||||
| Goodwill | $ | 136.7 | $ | — | $ | 136.7 | |||||
| Indefinite-lived intangible assets | 27.7 | — | 27.7 | ||||||||
| Definite-lived intangible assets | 48.9 | 0.7 | 49.6 | ||||||||
| Assets held-for-sale | 0.6 | 1.1 | 1.7 | ||||||||
| IPR&D | 8.7 | — | 8.7 | ||||||||
| $ | 222.6 | $ | 1.8 | $ | 224.4 | ||||||
(1) Relates primarily to animal health and certain IPR&D.
Perrigo Company plc - Item 7
Consolidated
| Year Ended | |||||||||||||||||||
| December 31, 2017 | |||||||||||||||||||
CSCA(1) | CSCI(2) | RX(3) | Other(4) | Total | |||||||||||||||
| Definite-lived intangible assets | $ | — | $ | — | $ | 19.7 | $ | — | $ | 19.7 | |||||||||
| Assets held-for-sale | — | 3.7 | — | 3.3 | 7.0 | ||||||||||||||
| IPR&D | — | 1.1 | 11.6 | — | 12.7 | ||||||||||||||
| Property, plant, and equipment | 4.5 | — | 3.6 | — | 8.1 | ||||||||||||||
| $ | 4.5 | $ | 4.8 | $ | 34.9 | $ | 3.3 | $ | 47.5 | ||||||||||
(1) Relates to certain idle property, plant and equipment.
(2) Relates primarily to our Russian business, assets held-for-sale, which werewas sold August 25, 2017 (refer to Item 8. Note 2).2017.
(3) Relates primarily to intangible assets acquired through the Lumara Health, Inc. acquisition and In-Process Research and Development ("IPR&D")&D assets acquired in conjunction with certain Development-Stage Rx Products(refer to Item 8. Note 3).Products.
(4) Relates to our Israel API assets held-for-sale,business, which werewas sold November 21, 2017 (refer to Item 8. Note 2).2017.
| Year Ended | ||||||||||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||
| Goodwill | Indefinite-Lived Intangible Assets | Definite-Lived Intangible Assets | Assets Held-For-Sale | IPR&D | Fixed Assets | Total | ||||||||||||||||||||||
CHCA(1) | $ | 24.5 | $ | 0.4 | $ | — | $ | 9.9 | $ | — | $ | 3.5 | $ | 38.3 | ||||||||||||||
CHCI(2) | 868.4 | 849.1 | 321.4 | — | 3.5 | — | 2,042.4 | |||||||||||||||||||||
RX(3) | — | — | 342.2 | — | — | 0.2 | 342.4 | |||||||||||||||||||||
Specialty Sciences(4) | 199.6 | — | — | — | — | — | 199.6 | |||||||||||||||||||||
Other(5) | — | — | 2.0 | 6.3 | — | — | 8.3 | |||||||||||||||||||||
| $ | 1,092.5 | $ | 849.5 | $ | 665.6 | $ | 16.2 | $ | 3.5 | $ | 3.7 | $ | 2,631.0 | |||||||||||||||
Recent Trends and Developments
| • |
| Year Ended | |||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | |||||
| Net sales | $ | 2,507.1 | $ | 2,429.9 | |||
| Gross profit | $ | 825.2 | $ | 817.8 | |||
| Gross profit % | 32.9 | % | 33.7 | % | |||
| Operating income | $ | 399.8 | $ | 445.0 | |||
| Operating income % | 15.9 | % | 18.3 | % | |||
| • | On November 29, 2019, we acquired the branded OTC rights to Prevacid®24HR from GlaxoSmithKline for $61.5 million. The |
| • |
On July 1, 2019, we acquired Ranir, a privately-held leading global supplier of private label and branded oral self-care products, for $747.7 million. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a result of:global leader in consumer self-care solutions.
| • |
Perrigo Company plc - Item 7
CSCA
Segment Financial Results
Year Ended December 31, 2019 vs. December 31, 2018
| Year Ended | |||||||
| (in millions) | December 31, 2019 | December 31, 2018 | |||||
| Net sales | $ | 2,487.7 | $ | 2,411.6 | |||
| Gross profit | $ | 798.9 | $ | 789.0 | |||
| Gross profit % | 32.1 | % | 32.7 | % | |||
| Operating income | $ | 414.0 | $ | 174.4 | |||
| Operating income % | 16.6 | % | 7.2 | % | |||
Net sales increased $76.1 million, or 3%, due primarily to:
$162.1 million, or 7%, net increase due primarily to an increase of $106.4 million due to our acquisition of Ranir, increased volume due to OTC category growth, market share gains from store brand competitors partly driven by $36.2 million of new product sales, growth in certain categoriesOTC e-commerce, and increased OTC store brand penetration versus national brand, partially offset by lower infant formula contract pack sales as discussed above.several branded customers made the strategic decision to exit the category, lower net sales in the Mexico business, and competition-driven pricing pressure; partially offset by
| ◦ | $7.4 million decrease due to the retail market withdrawal of |
Operating income increased $239.6 million, impairment charge recorded on idle property, plant and equipment.or 137%, due primarily to:
| Year Ended | |||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | |||||
| Net sales | $ | 2,554.2 | $ | 2,507.1 | |||
| Gross profit | $ | 846.7 | $ | 825.2 | |||
| Gross profit % | 33.2 | % | 32.9 | % | |||
| Operating income | $ | 439.9 | $ | 399.8 | |||
| Operating income % | 17.2 | % | 15.9 | % | |||
| Six Months Ended | |||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | |||||
| Net sales | $ | 1,176.1 | $ | 1,251.5 | |||
| Gross profit | $ | 361.2 | $ | 417.9 | |||
| Gross profit % | 30.7 | % | 33.4 | % | |||
| Operating income | $ | 151.1 | $ | 209.2 | |||
| Operating income % | 12.9 | % | 16.7 | % | |||
| Year Ended | |||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | |||||
| Net sales | $ | 1,652.2 | $ | 1,491.0 | |||
| Gross profit | $ | 693.4 | $ | 682.0 | |||
| Gross profit % | 42.0 | % | 45.7 | % | |||
| Operating income (loss) | $ | (2,087.4 | ) | $ | 12.5 | ||
| Operating income (loss) % | (126.3 | )% | 0.8 | % | |||
| Year Ended | |||||||
| ($ in millions) | December 31, 2015(1) | December 31, 2016 | |||||
| Net sales | $ | 1,360.6 | $ | 1,652.2 | |||
| Gross profit | $ | 614.7 | $ | 693.4 | |||
| Gross profit % | 45.2 | % | 42.0 | % | |||
| Operating loss | $ | (124.3 | ) | $ | (2,087.4 | ) | |
| Operating loss % | (9.1 | )% | (126.3 | )% | |||
| Six Months Ended | |||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | |||||
| Net sales | $ | 177.1 | $ | 833.0 | |||
| Gross profit | $ | 55.9 | $ | 386.0 | |||
| Gross profit % | 31.6 | % | 46.3 | % | |||
| Operating income (loss) | $ | 14.1 | $ | (148.5 | ) | ||
| Operating income (loss) % | 8.0 | % | (17.8 | )% | |||
| Year Ended | |||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | |||||
| Net sales | $ | 1,042.8 | $ | 969.7 | |||
| Gross profit | $ | 501.1 | $ | 449.7 | |||
| Gross profit % | 48.1 | % | 46.4 | % | |||
| Operating income (loss) | $ | (0.2 | ) | $ | 307.6 | ||
| Operating income (loss) % | — | % | 31.7 | % | |||
| ◦ | $15.5 million increase in selling and administrative expenses due primarily to increased advertising and promotional spending to support product launches and eCommerce growth, an increase in employee-related expenses, and the acquisition of Ranir; and |
| ◦ | $7.1 million increase in other operating expenses due to an asset abandonment related to |
Perrigo Company plc - Item 7
CSCA
Year Ended December 31, 20162018 vs. Year Ended December 31, 2015
2017
| Year Ended | |||||||
| (in millions) | December 31, 2018 | December 31, 2017 | |||||
| Net sales | $ | 2,411.6 | $ | 2,429.9 | |||
| Gross profit | $ | 789.0 | $ | 843.7 | |||
| Gross profit % | 32.7 | % | 34.7 | % | |||
| Operating income | $ | 174.4 | $ | 470.9 | |||
| Operating income % | 7.2 | % | 19.4 | % | |||
| Year Ended | |||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | |||||
| Net sales | $ | 1,001.9 | $ | 1,042.8 | |||
| Gross profit | $ | 543.3 | $ | 501.1 | |||
| Gross profit % | 54.2 | % | 48.1 | % | |||
| Operating income (loss) | $ | 377.8 | $ | (0.2 | ) | ||
| Operating income % | 37.7 | % | — | % | |||
Net sales increased $40.9decreased $18.3 million, or 4%1%, due primarily to:
$3.4 million decrease due to unfavorable Mexican peso foreign currency translation.
Operating income decreased $378.0$296.5 million, or 100%63%, due primarily to:
$54.7 million decrease in gross profit, or a 200 basis point decrease in gross profit as a result of:percentage of net sales, due primarily to operating variances and increased input costs, lower sales in the higher margin animal health business and pricing pressure; and
| ◦ | $44.8 million increase in R&D expense due primarily to a $50.0 million upfront license fee payment to enter into a license agreement with Merck; partially offset by |
| ◦ | $26.9 million decrease in restructuring expense related to the |
CONSUMER SELF-CARE INTERNATIONAL
Recent Developments
During the three months ended December 31, 2019, we identified impairment indicators related to certain pain relief products that we licensed from a third party and administration expensesreported as a definite-lived intangible asset. The impairment indicators related to commercial launch delays and a decision by the licensor to not extend the license agreement upon expiration. We determined the asset was fully impaired and recorded an asset impairment of $9.3 million, and$9.7 million.
| • |
On July 1, 2019, we acquired Ranir, a transaction that advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions. Ranir's non-U.S. operations are primarily in the United Kingdom, France, Germany, and China.
Perrigo Company plc- Item 7
Year Ended December 31, 20152019 vs. Six Months Ended December 27, 201431, 2018
| Year Ended | |||||||
| (in millions) | December 31, 2019 | December 31, 2018 | |||||
| Net sales | $ | 1,382.2 | $ | 1,399.3 | |||
| Gross profit | $ | 639.5 | $ | 668.7 | |||
| Gross profit % | 46.3 | % | 47.8 | % | |||
| Operating income | $ | 19.6 | $ | 6.8 | |||
| Operating income % | 1.4 | % | 0.5 | % | |||
| Six Months Ended | |||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | |||||
| Net sales | $ | 436.7 | $ | 502.6 | |||
| Gross profit | $ | 230.5 | $ | 253.4 | |||
| Gross profit % | 52.8 | % | 50.4 | % | |||
| Operating income | $ | 168.8 | $ | 181.9 | |||
| Operating income % | 38.6 | % | 36.2 | % | |||
Net sales increased $65.9decreased $17.1 million, or 15%1%, due primarily to:
| • |
$88.7 million decrease due to:
| ◦ | $86.9 million decrease due primarily to unfavorable Euro foreign currency translation; and |
| ◦ | $1.8 million decrease due to the retail market withdrawal of Ranitidine products. |
Operating income increased $12.8 million, or 188%, due to:
$29.2 million decrease in gross profit due primarily to unfavorable Euro foreign currency translation, partially offset by the acquisition of Ranir and a 150 basis point decrease in gross profit as a percentage of net sales due primarily to improved performance in the UK store brand business and the acquisition of Ranir, both of which have relatively lower gross margins than the overall portfolio; more than offset by
$42.0 million decrease in operating expenses due primarily to:
| ◦ | $42.4 million decrease in selling and administrative expenses due primarily to favorable Euro foreign currency translation, partially offset by an increase in employee-related expenses; and |
| ◦ | $7.7 million decrease in restructuring |
| ◦ | $7.9 million |
Year Ended December 31, 2018 vs. December 31, 2017
| Year Ended | |||||||
| (in millions) | December 31, 2018 | December 31, 2017 | |||||
| Net sales | $ | 1,399.3 | $ | 1,406.2 | |||
| Gross profit | $ | 668.7 | $ | 651.2 | |||
| Gross profit % | 47.8 | % | 46.3 | % | |||
| Operating income (loss) | $ | 6.8 | $ | (2.7 | ) | ||
| Operating income (loss) % | 0.5 | % | (0.2 | )% | |||
Perrigo Company plc - Item 7
CSCI
Net sales decreased $6.9 million due primarily to:
$11.2 million net decrease due primarily to lower sales in the healthy lifestyle and upper respiratory categories and $19.7 million decrease due to discontinued products, partially offset by new product sales of $76.6 million; partially offset by
$4.3 million increase due to:
| ◦ | $37.3 million increase due to favorable Euro foreign currency translation; partially offset by |
| ◦ | $33.0 million decrease due to the exited Russian business and 2017 distribution phase out initiatives. |
Operating income increased $9.5 million due to:
$17.5 million increase in gross profit, or a 150 basis point increase in gross profit as a percentage of net sales, due primarily to brand prioritization and exit of low margin businesses, improved pricing and benefits from continued insourcing initiatives; partially offset by
$8.0 million increase in operating expenses due primarily to $5.8 million increase in distribution expense, and $3.0 million increase in R&D expense due primarily to innovation investments and the effect of foreign currency translation.
Recent Trends and Developments
| • | Although pricing pressure is showing some signs of moderation, during 2019 we continued to experience a significant year-over-year reduction in pricing in our RX segment due to competitive pressure. We expect softness in pricing to continue to impact the segment for the foreseeable future. |
| • | On |
| • | During the three months ended |
| • | During the three months ended December 31, 2019, we identified impairment indicators on a definite-lived intangible asset related to our clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®). Increased competition caused price erosion that lowered our long-range revenue forecast, which indicated the asset was no longer recoverable and was partially impaired. We recorded an asset impairment of $21.2 million. |
On July 2, 2019, we purchased the Abbreviated New Drug Application ("ANDA") for a generic gel product for $49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019.
| • | During the three months ended September 28, 2019, we identified impairment indicators related to our Evamist® branded product, which is a definite-lived intangible asset. The indicators related to a decline in sales volume and a corresponding reduction in our long-range revenue forecast. We recorded an asset impairment of $10.8 million. |
On May 17, 2019, we purchased the ANDA for a generic product used to relieve pain for $15.7 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019.
Perrigo Company plc- Item 7
RX
During the three months ended June 29, 2019, we identified impairment indicators for a certain definite-lived asset related to changes in pricing and competition in the market, which lowered the projected cash flows we expect to generate from the asset. We recorded an asset impairment of $27.8 million.
Segment Financial Results
Year Ended December 31, 2019 vs. December 31, 2018
| Year Ended | |||||||
| (in millions) | December 31, 2019 | December 31, 2018 | |||||
| Net sales | $ | 967.5 | $ | 920.8 | |||
| Gross profit | $ | 334.9 | $ | 373.9 | |||
| Gross profit % | 34.6 | % | 40.6 | % | |||
| Operating income | $ | 2.6 | $ | 214.6 | |||
| Operating income % | 0.3 | % | 23.3 | % | |||
Net sales increased $46.7 million, or 5%, due primarily to:
| • | $87.5 million increase due to new product sales of $86.3 million driven mainly by Acyclovir cream (generic equivalent to Zovirax® cream), Testosterone Gel 1.62% (generic equivalent to Androgel®), and the Scopolamine Patch relaunch and higher volumes of existing product sales to meet the increased demand of our existing customers, partially offset by competition-driven pricing pressure; partially offset by |
$41.8 million of discontinued products.
Operating income decreased $212.0 million, or 99%, due to:
$39.0 million decrease in gross profit, or a 600 basis point decrease in gross profit as a percentage of net sales, due primarily to competition-driven pricing pressure, and unfavorable product mix; and
| • | $173.0 million increase in operating expense due primarily to $170.7 million increase in impairment charges related to goodwill, certain definite-lived intangible assets and IPR&D, and a $4.8 million increase in R&D expense due primarily to pre-commercialization R&D costs for generic albuterol sulfate inhalation aerosol, the generic version of ProAir® HFA. |
Year Ended December 31, 20162018 vs. Year Ended December 31, 20152017
| Year Ended | |||||||
| (in millions) | December 31, 2018 | December 31, 2017 | |||||
| Net sales | $ | 920.8 | $ | 1,054.4 | |||
| Gross profit | $ | 373.9 | $ | 454.6 | |||
| Gross profit % | 40.6 | % | 43.1 | % | |||
| Operating income | $ | 214.6 | $ | 306.1 | |||
| Operating income % | 23.3 | % | 29.0 | % | |||
Net sales decreased $133.6 million, or 13%, due primarily to:
$176.8 million decrease due to $162.2 million decrease in sales of existing products due primarily to increased competition-driven pricing pressure and decreased sales volumes of certain products and $14.6 million decrease due to discontinued products; partially offset by
Perrigo Company plc- Item 7
RX
| • | $43.2 million increase due to new product sales due primarily to Testosterone Gel 1.62% (generic equivalent to Androgel®). |
Operating income decreased $91.5 million, or 30%, due to:
$80.7 million decrease in gross profit, or a 250 basis point decrease in gross profit as a percentage of net sales, due primarily to pricing pressure and unfavorable product mix as a result of sales growth in lower margin products; and
$10.8 million increase in operating expense due primarily to:
| ◦ | $23.0 million increase for the absence of the gain on the sale of certain ANDAs recognized in the prior year, $15.0 million increase for the absence of the gain related to contingent consideration adjustments, and $9.8 million increase in R&D expense due to timing of clinical trials; partially offset by |
| ◦ | $34.9 million decrease in impairment charges related to certain definite-lived intangible assets and IPR&D. |
OTHER
We previously had two legacy segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and API businesses, respectively, which we divested. Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were $201.2 million formoved to unallocated expenses.
During the year ended December 31, 2015, compared2017, we completed the divestment of the Tysabri® financial asset to $15.0Royalty Pharma for $2.2 billion upfront in cash and up to $250.0 million forand $400.0 million in milestone payments if the priorroyalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain in Change in financial assets. See "Interest, Other (Income) Expense and Change in Financial Assets (Consolidated)" below.
During the year period. The decreases of $186.2 million primarily relates to a $199.6 million impairment charge related to the Tysabri® goodwill (refer to Item 8. Note 3).
| Year Ended | |||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | |||||
| Net sales | $ | 78.5 | $ | 55.6 | |||
| Gross profit | $ | 32.3 | $ | 30.9 | |||
| Gross profit % | 41.2 | % | 55.6 | % | |||
| Operating income | $ | 6.1 | $ | 8.7 | |||
| Operating income % | 7.8 | % | 15.6 | % | |||
| Year Ended | |||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | |||||
| Net sales | $ | 98.0 | $ | 78.5 | |||
| Gross profit | $ | 44.7 | $ | 32.3 | |||
| Gross profit % | 45.5 | % | 41.2 | % | |||
| Operating income (loss) | $ | (7.1 | ) | $ | 6.1 | ||
| Operating income (loss) % | (7.3 | )% | 7.8 | % | |||
| Six Months Ended | |||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | |||||
| Net sales | $ | 54.8 | $ | 45.1 | |||
| Gross profit | $ | 26.2 | $ | 21.6 | |||
| Gross profit % | 47.7 | % | 47.8 | % | |||
| Operating income (loss) | $ | 14.5 | $ | (19.5 | ) | ||
| Operating income (loss) % | 26.4 | % | (43.3 | )% | |||
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded above Operating income on the Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
| Six Months Ended | Year Ended | |||||||||||||||||
| December 27, 2014 | December 31, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2017 | ||||||||||||||
| $ | 49.6 | $ | 149.0 | $ | 220.9 | $ | 116.6 | $ | 174.7 | |||||||||
| Year Ended | ||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||
| $ | 231.4 | $ | 159.2 | $ | 183.9 | |||||
Perrigo Company plc - Item 7
Other
The $58.1$72.2 million increase for the year ended December 31, 20172019 compared to the prior year was due primarily to a $31.0 million increase in legal and consulting fees partially due to the absence of a $17.8 million insurance recovery received in the prior year, a $15.6 million increase in acquisition and integration-related charges related to the Ranir acquisition, a $13.8 million increase in employee compensation expenses, and a $10.7 million increase due primarily to our strategic transformation initiative and the reorganization of our executive management team.
The $24.7 million decrease for the year ended December 31, 2018 compared to the prior year was due primarily to an increaseinsurance recovery of $17.8 million, a decrease in share-based compensationlegal and consulting fees of $8.7 million and, a decrease in restructuring expense of $12.6 million driven primarily by the resignation of certain executives, an increase of $41.1 million of administrative expenses driven by legal fees, consulting fees and employee-related expenses, and an increase in restructuring of $6.0$5.5 million related to strategic organizational enhancements (referenhancements; partially offset by an increase in employee-related expenses of $5.2 million.
Interest, Other (Income) Expense and Change in Financial Assets (Consolidated)
| Year Ended | |||||||||||
| (in millions) | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||
| Change in financial assets | $ | (22.1 | ) | $ | (188.7 | ) | $ | 24.9 | |||
| Interest expense, net | $ | 121.7 | $ | 128.0 | $ | 168.1 | |||||
| Other (income) expense, net | $ | (66.0 | ) | $ | 6.1 | $ | (10.1 | ) | |||
| Loss on extinguishment of debt | $ | 0.2 | $ | 0.5 | $ | 135.2 | |||||
Change in Financial Assets
The proceeds from our 2017 sale of the Tysabri® financial asset consisted of $2.2 billion in upfront cash and up to Item 8. Note 15).
During the year ended December 31, 2019 the fair value of the Royalty Pharma milestone payment related to 2020 increased by $22.1 million to $95.3 million. These adjustments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the earn-out.
In order for us to receive the milestone payment related to 2020 of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales in 2020 must exceed $351.0 million. The Royalty Pharma payments from Biogen for Tysabri® were $337.5 million in 2018. If Royalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write-off the $95.3 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $304.7 million in Change in financial assets on the Consolidated Statements of Operations (refer to Item 8. Note 7).
During the year ended December 31, 2018, royalties on global net sales of Tysabri® received by Royalty Pharma met the 2018 threshold resulting in an increase to the asset and a gain of $170.1 million recognized in Change in financial assets on the Consolidated Statement of Operations. Also during that period, the fair value of the remaining Royalty Pharma contingent milestone payment related to 2020 increased $18.6 million due to higher projected global net sales of Tysabri® and the estimated probability of achieving the contingent milestone payment related to 2020.
Interest Expense, Net
The $6.3 million decrease during the year ended December 31, 2019 compared to the prior year was due primarily to changes in our underlying hedge exposure and interest income (refer to Item 8. Note 9).
The $40.1 million decrease during the year ended December 31, 2018 compared to the prior year was the result of early debt repayments made during the year ended December 31, 2017.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Other (Income) Expense, Net
The $72.1 million change was due primarily to a $71.7 million pre-tax gain on the sale of our animal health business (refer to Item 8. Note 3)
The $16.2 million decrease during the year ended December 31, 2018 compared to the prior year was due primarily to the absence of legal and professional fees related to our defense against the unsolicited takeover bid by Mylan of $100.3 million and Omega acquisition-related fees of $18.1 million. We also experienced a $15.0 million reduction in share-based compensation compared to the prior year due primarily to the resignation of our former Chief Executive Officer, Joseph C. Papa. These decreases were offset partially by a $36.2 million increase in legal and professional fees in the current year.
| Six Months Ended | Year Ended | ||||||||||||||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2017 | ||||||||||||||
| Change in financial assets | $ | (46.9 | ) | $ | (57.3 | ) | $ | (88.8 | ) | $ | 2,608.2 | $ | 24.9 | ||||||
| Interest expense, net | $ | 56.7 | $ | 89.9 | $ | 179.1 | $ | 216.6 | $ | 168.1 | |||||||||
| Other expense (Income), net | $ | 60.3 | $ | 25.2 | $ | 299.1 | $ | 22.7 | $ | (10.1 | ) | ||||||||
| Loss on extinguishment of debt | $ | 9.6 | $ | 0.9 | $ | 1.8 | $ | 1.1 | $ | 135.2 | |||||||||
Loss on Extinguishment of Debt
During the year ended December 31, 2017, we recorded a $135.2 million loss on extinguishment of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts related to the $500.0 million 3.500% senior notes due December 2021, $500.0 million 3.500% senior notes due March 2021, $400.0 million 4.900% senior notes due 2044, $800.0 million 4.000% senior notes due 2023, and $400.0 million 5.300% senior notes due 2043.discounts.
Income Taxes (Consolidated)
The effective tax rates were as follows:
| Six Months Ended | Year Ended | ||||||||||||
| December 27, 2014 | December 31, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2017 | |||||||||
| 14.0 | % | (376.2 | )% | 103.3 | % | 17.2 | % | 57.3 | % | ||||
| Year Ended | |||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||
| 14.6 | % | 54.9 | % | 57.3 | % | ||
The effective tax rate for the year ended December 31, 2017 was higher compared2019 decreased in comparison to the prior year ended December 31, 2016due primarily to a decrease in the U.S. valuation allowance offset by increased U.S. permanent adjustments largely due to an increase in the valuation allowance position due to current year activity, tax law changes in the U.S., increases in unrecognized tax benefits, offset by tax law changes in Belgium.disallowed interest expense.
The effective tax rate for the year ended December 31, 2016 was lower compared2018 decreased in comparison to the prior year ended December 31, 2015due primarily to the 2017 sale of API Israel and the one-time U.S. transition toll tax, offset by additional tax expense due to the impact of the asset impairmentsvaluation allowances in Belgium and state tax recorded during the year ended December 31, 2016. The effective tax rate for the year ended December 31, 2015 was impacted by the impairmentfuture distributions of Omega's intangible assets, India API assets being classified as held for sale, the valuation allowance on deferred taxes and Omega transaction costs.foreign earnings recorded in 2018.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate other available financing sources including revolving bank credit and securities offerings. In determining our future capital requirements, we regularly consider, among other factors, known trends and uncertainties, such as the Notice of Assessment ("NoA") and the draft and final Notices of Proposed Adjustment ("NOPAs") and other contingencies. We note that no payment of the additional amounts assessed by Irish Revenue pursuant to the NoA or proposed by the IRS in the NOPAs is currently required, and no such payment is expected to be required, unless and until a final determination of the matter is reached that is adverse to us, which could take several years in either case (refer to Item 8. Note 15 for additional information on the NoA and NOPAs). Based on our current financial condition and credit relationships,the foregoing, management believes that our operations and borrowing resources are sufficient to provide for our currentshort-term and foreseeablelong-term capital requirements.requirements, as described below. However, an adverse result with respect to our appeal of any material outstanding tax assessments or litigation, including securities or drug pricing matters, could ultimately require the use of corporate assets to pay such assessments, damages resulting from third-party claims, and related interest and/or penalties, and any such use of corporate assets would limit the assets available for other corporate purposes. As such, we continue to evaluate the impact of commercial and capital market conditionsthe above factors on liquidity and may determine that modifications to our capital structure are appropriate if market conditions deteriorate, or if favorable capital market opportunities become available.available, or any change in conditions relating to the NoA, the NOPAs or other contingencies have a material impact on our capital requirements.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash and Cash Equivalents
*Working capital represents current assets less current liabilities, excluding cash and cash equivalents and current indebtedness.
Cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance the known and/or foreseeableour liquidity and capital expenditures.expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities. Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future.
Cash Generated by (Used in) Operating Activities
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | Increase/(Decrease) | ||||||||
| Cash Flows From (For) Operating Activities | |||||||||||
| Net income (loss) | $ | (4,012.8 | ) | $ | 119.6 | $ | 4,132.4 | ||||
| Non-cash adjustments | 4,769.2 | 683.2 | (4,086.0 | ) | |||||||
| Subtotal | 756.4 | 802.8 | 46.4 | ||||||||
| Increase (decrease) in cash due to: | |||||||||||
| Accounts receivable | (0.6 | ) | 3.2 | 3.8 | |||||||
| Inventories | 100.7 | (16.0 | ) | (116.7 | ) | ||||||
| Accounts payable | (75.7 | ) | (39.6 | ) | 36.1 | ||||||
| Payroll and related taxes | (41.1 | ) | (27.4 | ) | 13.7 | ||||||
| Accrued customer programs | (13.9 | ) | 34.6 | 48.5 | |||||||
| Accrued liabilities | (79.5 | ) | (47.8 | ) | 31.7 | ||||||
| Accrued income taxes | 20.9 | (6.1 | ) | (27.0 | ) | ||||||
| Other, net | (12.3 | ) | (4.8 | ) | 7.5 | ||||||
| Subtotal | $ | (101.5 | ) | $ | (103.9 | ) | $ | (2.4 | ) | ||
| Net cash from operating activities | $ | 654.9 | $ | 698.9 | $ | 44.0 | |||||
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
The $205.2 million decrease in operating cash flow was due primarily to:
$161.7 million decrease in cash due to the change in accounts receivable due primarily to timing of sales and receipt of payments primarily in RX and CSCI, and our acquisition of Ranir;
$142.6 million decrease in cash due to prior year tax payments made in the current year, current year estimated tax payments, and an Israeli withholding tax payment; and
$74.1 million decrease in cash due to the change in accrued customer programs due primarily to pricing dynamics in our RX segment, as well as timing of rebate and chargeback payments; partially offset by
$88.9 million increase in cash due to the change in net earnings after adjustments for items such as deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, share-based compensation, amortization of debt premium, gain on sale of business, and depreciation and amortization;
$36.0 million increase in cash due primarily to changes in operating leases and litigation related settlements;
$31.6 million decrease in the use of cash from operating activities duringprimarily due to the year ended December 31, 2017,continued build-up of inventory at a $44.0 million increase overlower level than in the prior year period,to support customer demands and improved supply management in our CSCA and CSCI segments, and increased volumes in CSCI due to new product launches; and
$30.8 million decrease in the use of cash due to the following:change in accrued payroll and related taxes due primarily to an increase in employee incentive compensation expense.
The $105.9 million decrease in operating cash flow was due primarily to:
$190.4 million decrease in cash due to the change in net earnings after adjustments for items such as deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, loss on extinguishment of debt, and depreciation and amortization; and
$68.4 million increase in cash due to the RX segment, as well as timing of rebate and chargeback payments;
$74.2 million increase in cash due to the change in accrued income taxes due primarily to U.S. Federal tax obligation payments made in the prior year, period; andoffset by expected tax refunds;
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | Increase/ (Decrease) | ||||||||
| Cash Flows From (For) Operating Activities | |||||||||||
| Net loss | $ | (1.9 | ) | $ | (4,012.8 | ) | $ | (4,010.9 | ) | ||
| Non-cash adjustments | 745.4 | 4,769.2 | 4,023.8 | ||||||||
| Subtotal | 743.5 | 756.4 | 12.9 | ||||||||
| Increase (decrease) in cash due to: | |||||||||||
| Accounts receivable | 4.8 | (0.6 | ) | (5.4 | ) | ||||||
| Inventories | (21.5 | ) | 100.7 | 122.2 | |||||||
| Accounts payable | (26.7 | ) | (75.7 | ) | (49.0 | ) | |||||
| Payroll and related taxes | (42.0 | ) | (41.1 | ) | 0.9 | ||||||
| Accrued customer programs | 53.9 | (13.9 | ) | (67.8 | ) | ||||||
| Accrued liabilities | 98.9 | (79.5 | ) | (178.4 | ) | ||||||
| Accrued income taxes | (67.9 | ) | 20.9 | 88.8 | |||||||
| Other, net | 21.3 | (12.3 | ) | (33.6 | ) | ||||||
| Subtotal | $ | 20.8 | $ | (101.5 | ) | $ | (122.3 | ) | |||
| Net cash from operating activities | $ | 764.3 | $ | 654.9 | $ | (109.4 | ) | ||||
$17.8 million increase in cash due to the change in accounts receivable due primarily to the discontinuation of legal expenses associated with the Mylan defense which were accrued at December 31, 2015, deferred revenue associated with the BCHour Belgium Distribution Contracts, andaccounts receivable factoring program, more than offset by timing of payments;sales and receipt of payments in our CSCA and RX segments.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
The $469.3 million decrease in investing cash flow was due primarily to:
| • |
| • | $113.5 million decrease in cash used for other acquisitions, primarily for the branded OTC rights to Prevacid®24HR for $61.7 million, an ANDA for a generic gel product for $49.0 million, an ANDA for a generic product used to relieve pain for $15.7 million, and Budesonide Nasal Spray and Triamcinolone Nasal Sprayfor $14.0 million, partially offset by the absence of $35.6 million of prior year acquisitions primarily related to an ANDA for a generic topical cream (refer to Item 8. Note 3); and |
| Six Months Ended | |||||||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | Increase / (Decrease) | ||||||||
| Cash Flows From (For) Operating Activities | |||||||||||
| Net income | $ | 180.6 | $ | 42.5 | $ | (138.1 | ) | ||||
| Non-cash adjustments | 88.6 | 279.2 | 190.6 | ||||||||
| Subtotal | 269.2 | 321.7 | 52.5 | ||||||||
| Increase (decrease) in cash due to: | |||||||||||
| Accounts receivable | (3.4 | ) | 52.5 | 55.9 | |||||||
| Inventories | (19.4 | ) | (29.6 | ) | (10.2 | ) | |||||
| Accounts payable | (46.8 | ) | (194.1 | ) | (147.3 | ) | |||||
| Payroll and related taxes | (26.3 | ) | (38.2 | ) | (11.9 | ) | |||||
| Accrued customer programs | 51.8 | 34.4 | (17.4 | ) | |||||||
| Accrued liabilities | 52.1 | 108.1 | 56.0 | ||||||||
| Accrued income taxes | 33.1 | (56.8 | ) | (89.9 | ) | ||||||
| Other, net | (18.3 | ) | 2.9 | 21.2 | |||||||
| Subtotal | $ | 22.8 | $ | (120.8 | ) | $ | (143.6 | ) | |||
| Net cash from operating activities | $ | 292.0 | $ | 200.9 | $ | (91.1 | ) | ||||
infant formula capacity and quality/regulation projects; partially offset by
| • |
| • | $177.3 million in proceeds received from divestitures, primarily from our animal health business (refer to Item 8. Note 3). |
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | Increase/(Decrease) | ||||||||
| Cash Flows From (For) Investing Activities | |||||||||||
| Proceeds from royalty rights | $ | 353.7 | $ | 87.3 | $ | (266.4 | ) | ||||
| Acquisitions of businesses, net of cash acquired | (427.4 | ) | (0.4 | ) | $ | 427.0 | |||||
| Asset acquisitions | (65.1 | ) | — | $ | 65.1 | ||||||
| Proceeds from sale of securities | 4.5 | — | $ | (4.5 | ) | ||||||
| Additions to property, plant and equipment | (106.2 | ) | (88.6 | ) | $ | 17.6 | |||||
| Net proceeds from sale of business and other assets | 69.1 | 154.6 | $ | 85.5 | |||||||
Proceeds from sale of the Tysabri® financial asset | — | 2,200.0 | $ | 2,200.0 | |||||||
| Other investing, net | (3.6 | ) | (14.8 | ) | $ | (11.2 | ) | ||||
| Net cash from (for) investing activities | $ | (175.0 | ) | $ | 2,338.1 | $ | 2,513.1 | ||||
Year Ended December 31, 2018 vs. December 31, 2017
The $2.5 billion decrease in investing cash flow was due primarily to:
| • | $2.2 billion absence of proceeds from the 2017 divestment of our Tysabri® financial asset to Royalty Pharma; |
$149.4 million absence of 2017 net proceeds from sale of business and other assets;
$73.6 million decrease in proceeds from royalty rights; and
$35.6 million decrease in cash due primarily to the acquisition of an ANDA for a generic topical cream.
Cash used for capital expenditures totaled $102.6 million during the year ended December 31, 2018 compared to $88.6 million in the prior year. The increase in cash used for capital expenditures was due primarily to the increase in the number of manufacturing projects in the current year compared to the prior year.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Financing Activities
Year Ended December 31, 20162019 vs.Year Ended December 31, 20152018
The $573.7 million increase in financing cash flow was due primarily to:
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | Increase/ (Decrease) | ||||||||
| Cash Flows From (For) Investing Activities | |||||||||||
| Proceeds from royalty rights | $ | 335.1 | $ | 353.7 | $ | 18.6 | |||||
| Acquisitions of businesses, net of cash acquired | (2,886.4 | ) | (427.4 | ) | 2,459.0 | ||||||
| Asset acquisitions | (4.0 | ) | (65.1 | ) | (61.1 | ) | |||||
| Settlement of acquisition-related foreign currency derivatives | (304.8 | ) | — | 304.8 | |||||||
| Proceeds from sale of securities | — | 4.5 | 4.5 | ||||||||
| Additions to property, plant and equipment | (166.8 | ) | (106.2 | ) | 60.6 | ||||||
| Proceeds from sale of business | — | 69.1 | 69.1 | ||||||||
| Other investing, net | (2.7 | ) | (3.6 | ) | (0.9 | ) | |||||
| Net cash from (for) investing activities | $ | (3,029.6 | ) | $ | (175.0 | ) | $ | 2,854.6 | |||
$400.0 million absence in share repurchases;
$4.9 million increase in the change in net borrowings (repayments) of revolving credit agreements and other financing; and
$6.5 million decrease in payments on long-term debt; partially offset by
| • | $7.5 million increase in dividend payments. |
Year Ended December 31, 2018 vs. December 31, 2017
The $2.4 billion increase in financing cash flow was due primarily to:
$2.1 billion and $116.1 million decrease due to payments on long-term debt and premium on early debt retirement, respectively, related to debt extinguishment in 2017; and
$431.0 million increase in issuance of long-term debt in 2018; partially offset by
$208.5 million increase in share repurchases.
Share Repurchases
In October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. Share repurchases were $0.0 million, $400.0 million, and $191.5 million for the yearyears ended December 31, 2016, a $2.9 billion decrease over the prior year. The outflow in the year ended2019, December 31, 2016 was due primarily to the acquisitions of the Tretinoin Products2018, and the Generic Benzaclin™ product rights, which used $478.4 million in cash, offset partially by $353.7 million of proceeds from royalty rights. The outflow in the prior year was due primarily to $2.9 billion used for business acquisitions, most notably Omega, as well as $304.8 million related to the cash settlement of the non-designated foreign currency derivatives we used to hedge the euro-denominated Omega and GSK Products purchase prices. See Item 8. Note 2 and Item 8. Note 8 for more information on the above-mentioned acquisitions and derivatives, respectively.
| Six Months Ended | |||||||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | Increase / (Decrease) | ||||||||
| Cash Flows From (For) Investing Activities | |||||||||||
| Proceeds from royalty rights | $ | 175.8 | $ | 166.3 | $ | (9.5 | ) | ||||
| Acquisitions of businesses, net of cash acquired | (83.0 | ) | (791.6 | ) | $ | (708.6 | ) | ||||
| Settlement of acquisition-related foreign currency derivatives | (26.4 | ) | (1.3 | ) | $ | 25.1 | |||||
| Additions to property, plant and equipment | (48.0 | ) | (77.8 | ) | $ | (29.8 | ) | ||||
| Other investing, net | 0.8 | (3.7 | ) | $ | (4.5 | ) | |||||
| Net cash from (for) investing activities | $ | 19.2 | $ | (708.1 | ) | $ | (727.3 | ) | |||
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2016 | December 31, 2017 | Increase/(Decrease) | ||||||||
| Cash Flows From (For) Financing Activities | |||||||||||
| Issuances of long-term debt | $ | 1,190.3 | $ | — | $ | (1,190.3 | ) | ||||
| Borrowings (repayments) of revolving credit agreements and other financing, net | (802.5 | ) | 6.8 | 809.3 | |||||||
| Payments on long-term debt | (559.2 | ) | (2,611.0 | ) | (2,051.8 | ) | |||||
| Deferred financing fees | (2.8 | ) | (4.8 | ) | (2.0 | ) | |||||
| Premium on early debt retirement | (0.6 | ) | (116.1 | ) | (115.5 | ) | |||||
| Issuance of ordinary shares | 8.3 | 0.7 | (7.6 | ) | |||||||
| Equity issuance costs | (10.3 | ) | — | 10.3 | |||||||
| Repurchase of ordinary shares | — | (191.5 | ) | (191.5 | ) | ||||||
| Cash dividends | (83.2 | ) | (91.1 | ) | (7.9 | ) | |||||
| Other financing, net | (8.7 | ) | 2.3 | 11.0 | |||||||
| Net cash for financing activities | $ | (268.7 | ) | $ | (3,004.7 | ) | $ | (2,736.0 | ) | ||
| Year Ended | |||||||||||
| ($ in millions) | December 31, 2015 | December 31, 2016 | Increase / (Decrease) | ||||||||
| Cash Flows From (For) Financing Activities | |||||||||||
| Borrowings (repayments) of revolving credit agreements and other financing, net | $ | 666.0 | $ | (802.5 | ) | $ | (1,468.5 | ) | |||
| Issuances of long-term debt | — | 1,190.3 | 1,190.3 | ||||||||
| Payments on long-term debt | (917.3 | ) | (559.2 | ) | 358.1 | ||||||
| Premium on early debt retirement | — | (0.6 | ) | (0.6 | ) | ||||||
| Deferred financing fees | (3.6 | ) | (2.8 | ) | 0.8 | ||||||
| Issuance of ordinary shares | 8.9 | 8.3 | (0.6 | ) | |||||||
| Equity issuance costs | — | (10.3 | ) | (10.3 | ) | ||||||
| Repurchase of ordinary shares | (500.0 | ) | — | 500.0 | |||||||
| Cash dividends | (72.2 | ) | (83.2 | ) | (11.0 | ) | |||||
| Other financing, net | (19.0 | ) | (8.7 | ) | 10.3 | ||||||
| Net cash from (for) financing activities | $ | (837.2 | ) | $ | (268.7 | ) | $ | 568.5 | |||
| Six Months Ended | |||||||||||
| ($ in millions) | December 27, 2014 | December 31, 2015 | Increase / (Decrease) | ||||||||
| Cash Flows From (For) Financing Activities | |||||||||||
| Issuances of long-term debt | $ | 2,504.3 | $ | — | $ | (2,504.3 | ) | ||||
| Borrowings (repayments) of revolving credit agreements and other financing, net | (2.1 | ) | 718.0 | $ | 720.1 | ||||||
| Payments on long-term debt | (934.5 | ) | (28.3 | ) | $ | 906.2 | |||||
| Deferred financing fees | (24.8 | ) | (0.3 | ) | $ | 24.5 | |||||
| Issuance of ordinary shares | 1,039.5 | 4.9 | $ | (1,034.6 | ) | ||||||
| Equity issuance costs | (35.7 | ) | — | $ | 35.7 | ||||||
| Repurchase of ordinary shares | — | (500.0 | ) | $ | (500.0 | ) | |||||
| Cash dividends | (29.0 | ) | (36.3 | ) | $ | (7.3 | ) | ||||
| Other financing, net | (8.8 | ) | (8.4 | ) | $ | 0.4 | |||||
| Net cash from financing activities | $ | 2,508.9 | $ | 149.6 | $ | (2,359.3 | ) | ||||
Dividends
In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. We paid dividends as follows:
| Year Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Dividends paid (in millions) | $ | 112.4 | $ | 104.9 | $ | 91.1 | |||||
| Dividends paid per share | $ | 0.82 | $ | 0.76 | $ | 0.64 | |||||
| Six Months Ended | Year Ended | ||||||||||||||
| December 27, 2014 | December 31, 2015 | December 31, 2016 | December 31, 2017 | ||||||||||||
| Dividends paid (in millions) | $ | 29.0 | $ | 36.3 | $ | 83.2 | $ | 91.1 | |||||||
| Dividends paid per share | $ | 0.21 | $ | 0.25 | $ | 0.58 | $ | 0.64 | |||||||
The declaration and payment of dividends, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements, and other factors our Board of Directors may consider relevant.
| Declaration Date | Record Date | Payable | Dividend Declared | |||||
| Year Ended December 31, 2017 | ||||||||
| November 2, 2017 | December 1, 2017 | December 19, 2017 | $ | 0.160 | ||||
| August 8, 2017 | August 25, 2017 | September 12, 2017 | $ | 0.160 | ||||
| May 3, 2017 | May 26, 2017 | June 13, 2017 | $ | 0.160 | ||||
| February 21, 2017 | March 3, 2017 | March 21, 2016 | $ | 0.160 | ||||
| Year Ended December 31, 2016 | ||||||||
| November 8, 2016 | November 25, 2016 | December 13, 2016 | $ | 0.145 | ||||
| August 2, 2016 | August 26, 2016 | September 13, 2016 | $ | 0.145 | ||||
| April 26, 2016 | May 27, 2016 | June 14, 2016 | $ | 0.145 | ||||
| February 16, 2016 | February 26, 2016 | March 15, 2016 | $ | 0.145 | ||||
| Six Months Ended December 31, 2015 | ||||||||
| November 4, 2015 | November 27, 2015 | December 15, 2015 | $ | 0.125 | ||||
| August 12, 2015 | August 28, 2015 | September 15, 2015 | $ | 0.125 | ||||
Borrowings and Capital Resources
Overdraft Facilities
We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in "Other Financing" in Item 8,8. Note 1011. The balanceThere were no borrowings outstanding under the facilities was $6.9 million and $82.9 million atas of December 31, 2017 and2019 or December 31, 2015, respectively,2018.
Leases
We had $158.2 million of lease liabilities and there were no balances outstanding under the facilities at$157.5 million of lease assets as of December 31, 2016.2019.
Accounts Receivable Factoring
We have accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was $27.5 million, $50.7$10.0 million and $64.5$24.3 million at December 31, 2017, December 31, 20162019 and December 31, 2015,2018, respectively.
Revolving Credit Agreements
On March 8, 2018, we terminated the revolving credit agreement entered into in December 9, 2015, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"),2014 and entered into a $750.0 million$1.0 billion revolving credit agreement maturing on March 8, 2023 (the "2015"2018 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $750.0 million then outstanding under the 2015 Revolver and terminated the facility.
2018.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Total Term Loans, Notes and Bonds outstanding are summarized as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. The adjustment does not affect cash interest payments.follows (in millions):
| Year Ended | |||||||||
| December 31, 2019 | December 31, 2018 | ||||||||
| Term loan | |||||||||
| * | 2018 Term loan due March 8, 2020 | $ | — | $ | 351.3 | ||||
| 2019 Term loan due August 15, 2022 | 600.0 | — | |||||||
| Total term loans | 600.0 | 351.3 | |||||||
| Notes and bonds | |||||||||
| Coupon | Due | ||||||||
| * | 5.000% | May 23, 2019 | — | 137.6 | |||||
| 3.500% | March 15, 2021 | 280.4 | 280.4 | ||||||
| 3.500% | December 15, 2021 | 309.6 | 309.6 | ||||||
| * | 5.105% | July 28, 2023 | 151.4 | 154.9 | |||||
| 4.000% | November 15, 2023 | 215.6 | 215.6 | ||||||
| 3.900% | December 15, 2024 | 700.0 | 700.0 | ||||||
| 4.375% | March 15, 2026 | 700.0 | 700.0 | ||||||
| 5.300% | November 15, 2043 | 90.5 | 90.5 | ||||||
| 4.900% | December 15, 2044 | 303.9 | 303.9 | ||||||
| Total notes and bonds | $ | 2,751.4 | $ | 2,892.5 | |||||
| * | Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate. |
Debt Repayments and Related Extinguishment During the Year Ended December 31, 2017
During the year ended December 31, 2017,2019, we reduced our outstanding debt through a variety of transactions (in millions):
| Date | Series | Transaction Type | Principal Retired | |||||
| April 1, 2017 | 2014 term loan due December 5, 2019 | Scheduled quarterly payment | $ | 13.3 | ||||
| May 8, 2017 | $600.0 2.300% senior notes due 2018 | Early redemption | 600.0 | |||||
| May 23, 2017 | €180.0 4.500% retail bonds due 2017 | Scheduled maturity | 201.3 | |||||
| June 15, 2017 | $500.0 3.500% senior notes due 2021 | Tender offer | 190.4 | |||||
| June 15, 2017 | $500.0 3.500% senior notes due 2021 | Tender offer | 219.6 | |||||
| June 15, 2017 | $800.0 4.000% senior notes due 2023 | Tender offer | 584.4 | |||||
| June 15, 2017 | $400.0 5.300% senior notes due 2043 | Tender offer | 309.5 | |||||
| June 15, 2017 | $400.0 4.900% senior notes due 2044 | Tender offer | 96.1 | |||||
| July 1, 2017 | 2014 term loan due December 5, 2019 | Scheduled quarterly payment | 14.3 | |||||
| September 30, 2017 | 2014 term loan due December 5, 2019 | Scheduled quarterly payment | 14.8 | |||||
| December 12, 2017 | €300.0 5.125% senior notes due 2017 | Scheduled maturity | 352.3 | |||||
| December 31, 2017 | 2014 term loan due December 5, 2019 | Scheduled quarterly payment | 15.0 | |||||
| $ | 2,611.0 | |||||||
| Premium on debt repayment | $ | 116.1 | ||
| Transaction costs | 3.8 | |||
| Write-off of deferred financing fees | 10.6 | |||
| Write-off of remaining discount on bond | 4.7 | |||
| Total loss on extinguishment of debt | $ | 135.2 | ||
We are in compliance with all covenants under our debt agreements as of December 31, 2017.
Credit Ratings
Our credit ratings on December 31, 20172019 were Baa3 (stable) and BBB- (stable) by Moody's Investors Service and Standard and Poor's Rating Services,S&P Global Ratings, respectively.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in operating performance, the economic environment, our financial position, and changes in business strategy. If changes in our credit ratings were to occur, they could impact, among other things, future borrowing costs, access to capital markets, and vendor financing terms.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into R&D arrangements with third parties that often require milestone payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the product. Because of the contingent nature of these payments, they are not included in our table of contractual obligations below.
Contractual Obligations
Our enforceable and legally binding obligations as of December 31, 20172019 are set forth in the following table. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including the duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations actually paid in future periods may vary from the amounts reflected in the table (in millions).:
| Payment Due | Payment Due | |||||||||||||||||||||||||||||||||||||
| 2018 | 2019-2020 | 2021-2022 | After 2022 | Total | 2020 | 2021-2022 | 2023-2024 | After 2024 | Total | |||||||||||||||||||||||||||||
Short and long-term debt (1) | $ | 198.3 | $ | 746.9 | $ | 791.9 | $ | 2,767.8 | $ | 4,504.9 | $ | 128.1 | $ | 1,412.8 | $ | 1,237.2 | $ | 1,519.5 | $ | 4,297.6 | ||||||||||||||||||
| Capital lease obligations | 0.8 | 1.4 | — | — | 2.2 | 4.1 | 8.1 | 3.0 | 14.2 | 29.4 | ||||||||||||||||||||||||||||
Purchase obligations (2) | 757.2 | 13.7 | 0.1 | — | 771.0 | 824.1 | 21.5 | 0.3 | — | 845.9 | ||||||||||||||||||||||||||||
Operating leases (3) | 38.1 | 56.2 | 32.3 | 16.6 | 143.2 | 37.2 | 47.6 | 26.9 | 41.5 | 153.2 | ||||||||||||||||||||||||||||
| Other contractual liabilities reflected on the consolidated balance sheets: | ||||||||||||||||||||||||||||||||||||||
Deferred compensation and benefits (4) | — | — | — | 92.1 | 92.1 | — | — | — | 104.8 | 104.8 | ||||||||||||||||||||||||||||
Other (5) | 90.0 | 6.6 | 4.9 | 1.5 | 103.0 | 50.4 | 6.6 | 1.8 | — | 58.8 | ||||||||||||||||||||||||||||
| Total | $ | 1,084.4 | $ | 824.8 | $ | 829.2 | $ | 2,878.0 | $ | 5,616.4 | $ | 1,043.9 | $ | 1,496.6 | $ | 1,269.2 | $ | 1,680.0 | $ | 5,489.7 | ||||||||||||||||||
(1) | Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at December 31, |
(2) | Consists of commitments for both materials and services. |
(3) | Used in normal course of business, principally for warehouse facilities and computer equipment. |
(4) | Includes amounts associated with non-qualified plans related to deferred compensation, executive retention and post employment benefits. Of this amount, we have funded |
(5) | Primarily includes consulting fees, legal settlements, contingent consideration obligations, restructuring accruals, insurance obligations, and electrical and gas purchase contracts, which were accrued in Other current liabilities and Other non-current liabilities at December 31, |
We fund our U.S. qualified profit-sharing and investment plan in accordance with the Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. We are committed to making the required minimum contributions, which we expect to be approximately $25.9$24.8 million over the next 12 months. Future contributions are dependent upon various factors, including employees’ eligible compensation, plan participation and changes, if any, to current funding requirements. Therefore, no amounts were included in the Contractual Obligations table above. We generally expect to fund all future contributions with cash flows from operating activities.
As of December 31, 2017,2019, we had approximately $501.7$448.6 million of liabilities for uncertain tax positions.positions, including interest and penalties. These unrecognized tax benefits have been excluded from the Contractual Obligations table above due to uncertainty as to the amounts and timing of settlement with taxing authorities.
Net deferred income tax liabilities were $311.5$275.2 million as of December 31, 2017.2019. This amount is not included in the Contractual Obligations table above because we believe this presentation would not be meaningful. Net deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their book basis, which will result in taxable amounts in future years when the book basis is settled. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
any future periods. As a result, scheduling net deferred income tax liabilities as payments due by period could be misleading because this scheduling would not relate to liquidity needs.
Critical Accounting Estimates
The determination of certain amounts in our financial statements requires the use of estimates. These estimates are based upon our historical experiences combined with management’s understanding of current facts and circumstances. Although the estimates are considered reasonable based on the currently available information, actual results could differ from the estimates we have used. Management considers the below accounting estimates to require the most judgment and to be the most critical in the preparation of our financial statements. These estimates are reviewed by the Audit Committee.
The aggregate gross-to-net adjustments related to RX products can exceed 50% of the segment's gross sales. In contrast, the aggregate gross-to-net adjustments related to CHCACSCA and CHCICSCI typically do not exceed 10% of the segment's gross sales. Certain of these accrualsThe following table summarizes the activity in Accrued customer programs and allowances are recordedallowance accounts on the balance sheet as current liabilities, and others are recorded as a reduction in accounts receivable.
Consolidated Balance Sheets (in millions):
| RX | All Other Segments | ||||||||||||||||||||||
| Chargebacks | Medicaid Rebates | Sales Returns and Shelf Stock Allowances | Admin. Fees and Other Rebates | Rebates and Other Allowances | Total | ||||||||||||||||||
| Balance at December 31, 2017 | $ | 229.9 | $ | 36.8 | $ | 76.2 | $ | 43.2 | $ | 126.2 | $ | 512.3 | |||||||||||
| Foreign currency translation adjustments | — | — | — | — | (3.5 | ) | (3.5 | ) | |||||||||||||||
| Provisions / Adjustments | 1,754.4 | 58.3 | 17.0 | 99.6 | 270.3 | 2,199.6 | |||||||||||||||||
| Credits / Payments | (1,718.3 | ) | (58.7 | ) | (22.2 | ) | (98.3 | ) | (276.1 | ) | (2,173.6 | ) | |||||||||||
| Balance at December 31, 2018 | $ | 266.0 | $ | 36.4 | $ | 71.0 | $ | 44.5 | $ | 116.9 | $ | 534.8 | |||||||||||
| Balances acquired in business acquisition | — | — | — | — | 5.7 | 5.7 | |||||||||||||||||
| Balances disposed of in business divestiture | — | — | — | — | (4.1 | ) | (4.1 | ) | |||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (1.7 | ) | (1.7 | ) | |||||||||||||||
| Provisions / Adjustments | 2,127.2 | 47.9 | 33.9 | 116.5 | 224.6 | 2,550.1 | |||||||||||||||||
| Credits / Payments | (2,157.4 | ) | (56.7 | ) | (33.4 | ) | (126.3 | ) | (227.3 | ) | (2,601.1 | ) | |||||||||||
| Balance at December 31, 2019 | $ | 235.8 | $ | 27.6 | $ | 71.5 | $ | 34.7 | $ | 114.1 | $ | 483.7 | |||||||||||
Perrigo Company plc - Item 7
Critical Accounting Estimates
Chargebacks
We market and sell U.S. Rx pharmaceutical products directly to wholesalers, distributors, warehousing pharmacy chains, and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, collectively(collectively referred to as ("indirect"indirect customers"). In addition, we enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide chargeback credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler's invoice price. The accrual for chargebacks includes an estimate for outstanding claims that occurred but for which the related claim has not yet been paid, and an estimate for future claims that will be made when the wholesaler inventory is sold to the indirect customer. This estimate is based on historical chargeback experience, and confirmed wholesaler inventory levels, as well as estimatedwhich includes sell-through levels by wholesalers to retailers.retailers, and confirmed wholesaler inventory levels. We regularly assess current pricing dynamics and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated.
Medicaid Rebates
We participate in certain qualifying U.S. federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance, and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be billed as many as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Our rebates are reviewed on a monthly basis against actual claims data to ensure the liability is fairly stated.
Returns and Shelf Stock Allowances
Shelf stock allowances are credits issued to reflect changes in the selling price of a product and are based upon estimates of the amount of product remaining in a customer's inventory at the time of the anticipated price change. In many cases, the customer is contractually entitled to such a credit. The allowances for shelf stock adjustments are based on specified terms with certain customers, estimated launch dates of competing products, and estimated changes in market price.
Perrigo Company plc - Item 7
Critical Accounting Estimates
RX Administrative Fees and Other Rebates
In the CHCACSCA and CHCICSCI segments, we offer certain customers a volume incentive rebate if specific levels of product purchases are made during a specified period. The accrual for rebates is based on contractual agreements and estimated levels of purchasing. In addition, we have a reserve for product returns, primarily related to damaged and unsaleable products. We also have agreements with certain customers to cover promotional activities related to our products such as coupon programs, new store allowances, and product displays. The accrual for these activities is based on customer agreements and is established at the time product revenue is recognized.
Allowances for customer-related programs are generally recorded at the time of sale based on the estimates and methodologies described above. We continually monitor product sales provisions and re-evaluate these estimates as additional information becomes available, which includes, among other things, an assessment of current market conditions, trade inventory levels, and customer product mix. We make adjustments to these provisions at the end of each reporting period to reflect any such updates to the relevant facts and circumstances.
| Customer-Related Accruals and Allowances | |||||||||||||||||||||||
| RX | All Other Segments * | ||||||||||||||||||||||
| Chargebacks | Medicaid Rebates | Returns and Shelf Stock Allowances | Admin. Fees and Other Rebates | Rebates and Other Allowances | Total | ||||||||||||||||||
| Balance at June 27, 2015 | $ | 191.4 | $ | 31.6 | $ | 62.1 | $ | 45.3 | $ | 128.8 | $ | 459.2 | |||||||||||
| Foreign currency translation adjustments | — | — | — | — | (3.2 | ) | (3.2 | ) | |||||||||||||||
| Provisions / Adjustments | 666.3 | 11.7 | 21.3 | 47.8 | 144.3 | 891.4 | |||||||||||||||||
| Credits / Payments | (632.7 | ) | (18.6 | ) | (20.6 | ) | (53.1 | ) | (133.0 | ) | (858.0 | ) | |||||||||||
| Balance at December 31, 2015 | $ | 225.0 | $ | 24.7 | $ | 62.8 | $ | 40.0 | $ | 136.9 | $ | 489.4 | |||||||||||
| Foreign currency translation adjustments | — | — | — | — | (7.5 | ) | (7.5 | ) | |||||||||||||||
| Provisions / Adjustments | 1,437.2 | 27.4 | 48.0 | 103.4 | 259.6 | 1,875.6 | |||||||||||||||||
| Credits / Payments | (1,445.2 | ) | (27.5 | ) | (33.7 | ) | (108.8 | ) | (258.0 | ) | (1,873.2 | ) | |||||||||||
| Balance at December 31, 2016 | $ | 217.0 | $ | 24.6 | $ | 77.1 | $ | 34.6 | $ | 131.0 | $ | 484.3 | |||||||||||
| Foreign currency translation adjustments | — | — | — | — | 0.1 | 0.1 | |||||||||||||||||
| Provisions / Adjustments | 1,564.3 | 45.1 | 43.7 | 113.8 | 281.2 | 2,048.1 | |||||||||||||||||
| Credits / Payments | (1,551.4 | ) | (32.9 | ) | (44.6 | ) | (105.2 | ) | (286.1 | ) | (2,020.2 | ) | |||||||||||
| Balance at December 31, 2017 | $ | 229.9 | $ | 36.8 | $ | 76.2 | $ | 43.2 | $ | 126.2 | $ | 512.3 | |||||||||||
Income Taxes
Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments to our interpretation of transfer pricing standards,standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. and international tax reform);laws; changes in U.S. generally accepted accounting principles; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided taxes. For the year ended December 31, 2019 we recorded a net decrease in valuation allowances of $56.6 million, comprised primarily of a decrease in the U.S. valuation allowance related to the acquisition of Ranir and disposal of the Perrigo Animal Health business.
Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.assessments (refer to Item 8. Note 15).
Legal Contingencies
We are involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range and no amount within that range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters (refer to Item 8. Note 1617). We alsodo not incorporate insurance recoveries into our reserves for legal contingencies. We separately record anyreceivables for amounts due under insurance policies when we consider the realization of recoveries that arefor claims to be probable, of occurring.which may be different than the timing in which we establish the loss reserves.
Perrigo Company plc - Item 7
Critical Accounting Estimates
Acquisition Accounting
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the specifically identified net assets acquired is recorded as goodwill. Amounts allocated to acquired In Process Research and Development ("IPR&D") are recognized at fair value and initially characterized as indefinite-lived intangible assets, irrespective of whether the acquired IPR&D has an alternative future use. If the acquired net assets do not constitute a business, or substantially all of the fair value is in a single asset or group of similar assets, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date.
the valuations include discount rates, revenue growth assumptions and expected profit margins. We consider marketplace participant assumptions in determining the amount and timing of projected future cash flows adjusted foralong with the probabilitylength of technical and marketing success;
our customer relationships, the amount and timing of projected costsattrition, product or technology life cycles, barriers to develop IPR&D into commercially viable products;
cash flows in concluding upon our discount rate. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, we may record adjustments to the assets acquiredpurchase accounting. In addition, unanticipated market or macroeconomic events and liabilities assumed withcircumstances may occur that could affect the corresponding offset to goodwill. Upon the conclusionaccuracy or validity of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Useful life isWith the period over whichexception of certain trademarks, trade names, and brands and IPR&D, the majority of our acquired intangible asset isassets are expected to contribute directly or indirectlyhave determinable useful lives. Our assessment as to our future cash flows. We determine the useful lives of these intangible assets is based on a number of factors such as legal, regulatory, or contractual provisions that may limit the usefulincluding competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the effectsmacroeconomic environment of obsolescence, anticipated demand, existencethe countries in which the trademarked or absence of competition, and other economic factors onbranded products are sold. Definite-lived intangible assets are amortized to expense over their estimated useful life.
| Year Ended | Six Months Ended | ||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||
Tysabri® financial asset | |||||||||||
| Beginning balance | $ | 2,350.0 | $ | 5,310.0 | $ | 5,420.0 | |||||
| Royalties earned | — | (351.8 | ) | (167.3 | ) | ||||||
| Change in fair value | — | (2,608.2 | ) | 57.3 | |||||||
| Divestiture | (2,350.0 | ) | — | — | |||||||
| Ending balance | $ | — | $ | 2,350.0 | $ | 5,310.0 | |||||
Change in Financial Assets
| Year Ended | |||||
| December 31, 2019 | December 31, 2018 | ||||
| Volatility | 30.0 | % | 30.0 | % | |
| Rate of return | 7.92 | % | 8.05 | % | |
In order for us to receive the fair value of themilestone payment related to 2020, Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projectedfrom Biogen for Tysabri® revenues due to the launch of Ocrevus sales in 2020 must exceed $351.0 million. If Royalty Pharma payments from Biogen for Tysabri® late in the first quarter of 2017.
Perrigo Company plc - Item 7
Critical Accounting Estimates
not meet the prescribed threshold in 2020, we will write offwrite-off the $54.8$95.3 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations.and record a loss. If the prescribed threshold is exceeded, we will write upincrease the asset to $400.0 million and recognize income of $345.2$304.7 million in Change in financial assets on the Consolidated Statement of Operations.
| Year Ended | |||
| December 31, 2017 | |||
| Royalty Pharma Contingent Milestone Payments | |||
| Beginning balance | $ | — | |
| Additions | 184.5 | ||
| Payments | (8.0 | ) | |
| Change in fair value | (42.0 | ) | |
| Ending balance | $ | 134.5 | |
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received. We test goodwill forhave six reporting units subject to impairment testing annually, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists (refer to Item 8. Note 1). Effective in the year ended December 31, 2016,which we changed our segment structure. We performed our annual goodwill testing as of October 1, 2017,on the first day of the fourth quarter of the years ended December 31, 2019, 2018, and 2017. We performed impairment testing more frequently if events suggest an impairment may exist. We had triggering events during the second quarter of the year ended December 31, 2017.2019 and the third quarter of the year ended December 31, 2018, and we performed interim impairment tests in those periods. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows that include assumptions about future performance. The discount rates used in testing each of our reporting units’ goodwill for impairment as ofduring our interim and annual testing date in the fourth quarter of 2017 arewere based on the weighted average cost of capital determined for each of the Company’sour reporting units andunits. In our annual impairment test as of September 29, 2019, discount rates ranged from 7.5% to 13.5%. Perpetual12.0%, and perpetual growth rates for each reporting unitranged from 0.0% to 2.0%. In our annual impairment test as of September 30, 2018, discount rates ranged from 8.5% to 13.8%, and perpetual growth rates ranged from 2.0% to 3.0%. Changes in these estimates may result in the recognition of an impairment loss. We recorded goodwill impairment losses of $109.2 million related to our RX U.S. reporting unit and $136.7 million related to animal health during the years ended December 31, 2019 and December 31, 2018, respectively, which were recorded in Impairment charges on the Consolidated Statements of Operations. No goodwill impairments were recorded during the year ended December 31, 2017.
During our annual goodwill testing as of October 1, 2017,September 29, 2019 and September 30, 2018, we determined the fair value of each of ourthe Branded Consumer Self-care ("BCS") reporting units exceeded theirunit included in the CSCI segment was less than 10.0% higher than its net book values. Thevalue in both analyses. We performed additional quantitative analysis during the three months ended December 31, 2018 and concluded that the fair valuesvalue of the BCH, UK AUS, and Animal HealthBCS reporting units were eachunit remained less than 25.0%10.0% higher than their respectiveits net book values.value as of December 31, 2018. As a result theseof the relatively narrow margin between fair value and net book value during the three months ended December 31, 2019 and 2018, this reporting units are inherentlyunit is at a higher risk for future impairments if they experienceit experiences deterioration in business performance or market multiples or increases in discount rates. These reporting units had the following remaining
During our annual goodwill balancestesting as of December 31, 2017:September 29, 2019, we determined the fair value of the CSC UK and Australia reporting unit included in the CSCI segment was less than 20.0% higher than its net book value. With a margin between fair value and net book value in this range, the reporting unit is at risk for future goodwill impairments if it experiences deterioration in business performance or market multiples or increases in discount rates.
| Reporting Unit | Goodwill Remaining in Reporting Unit | Segment | Fair Value in excess of Carrying Value | |||||
| BCH | $ | 1,026.0 | CHCI | 6.6% | ||||
| Animal Health | $ | 178.9 | CHCA | 23.6% | ||||
| UK AUS | $ | 53.1 | CHCI | 18.3% | ||||
The discounted cash flow forecasts used for theseour reporting units in goodwill impairment testing include assumptions about future activity levels in the near term and longer-term. If growth in theseour reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in theone or more reporting units may beis impaired in future impairment tests. We continue to monitor the progress of our reporting units and assess the reporting unitsthem for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
Management performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the enterprise values of each reporting unit. Discount rates were increased and decreased by increments of 50 basis points, up to cumulative increases and decreases of 150 basis points. Perpetualperpetual revenue growth rates were increased and decreased by increments of 25 or 50 basis points, up to cumulative increases and decreases of 100points. For the BCS reporting unit, a 75 basis points. A summary ofpoint increase in the sensitivity analysis results is provided below for the three reporting units for which estimated fair value was less than 25.0% higher than net book value.
Perrigo Company plc - Item 7
Critical Accounting Estimates
Australia reporting unit, a 150 basis point increase in the discount rate, or a 100 basis point increase in the discount rate combined with a 50 basis point decrease in the residual growth rate, would indicate potential impairment for this reporting unit. Our sensitivities for both the BCS and CSC UK and Australia reporting units assume a corresponding decrease in market valuation multiples. Based on the sensitivity of the discount rate assumptionassumptions on the BCH reporting unit analysis, anythese analyses, an increase in the discount rate over the next twelve months could negatively impact the estimated fair value of thisthe reporting unitunits and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting unit,units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in BCH performance of our reporting units over the next twelve months, such as lower than expected revenuesrevenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis.
| Year Ended | Six Months Ended | ||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||
| Goodwill | $ | — | $ | 1,092.6 | $ | — | |||||
| Indefinite-lived intangible assets | $ | — | $ | 849.5 | $ | 185.1 | |||||
| IPR&D | $ | 12.7 | $ | 3.5 | $ | — | |||||
| Year Ended | |||||||
| December 31, 2017 | December 31, 2016 | ||||||
| Definite-lived Intangible assets | $ | 19.7 | $ | 665.5 | |||
Recently Issued Accounting Standards Pronouncements
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Exchange Risk
We are a global company with operations primarily throughout North America, Europe, Australia, Mexico, and Israel. We transact business in each location's local currency and in foreign currencies, thereby creating exposures to changes in exchange rates. Our largest exposure is the movement of the U.S. dollar relative to the euro, which has increased due to the Omega acquisition.euro. In addition, our U.S. operations continue to expand their export business, primarily in Canada, China, and Europe, and are subject to fluctuations in the respective exchange rates relative to the U.S. dollar. A large portion of the sales of our Israeli operations is in foreign currencies, primarily U.S. dollars and euros,Euros, while these operations largely incur costs in their local currency. Further, a portion of Biogen's global sales of Tysabri® are denominated in local currencies, creating exposures to changes in exchange rates relative to the U.S. dollar and thereby impacting the amount of U.S. dollar royalties necessary to achieve our contingent payment thresholdsthreshold in 2018 and 2020.
Due to different sales and cost structures, certain segments experience a negative impact and certain segments a positive impact as a result of changes in exchange rates. We estimate the translation effect of a ten percent devaluation of the U.S. dollar relative to the other foreign currencies in which we transact business would have increased operating income of our non-U.S. operating units by approximately $87.1$31.4 million for the year ended December 31, 2017.2019. This sensitivity analysis has inherent limitations. The analysis disregards the possibility that rates of multiple foreign currencies will not always move in the same direction relative to the value of the U.S. dollar over time and does not account for foreign exchange derivatives that we utilize to mitigate fluctuations in exchange rates.
In addition, we enter into certain purchase commitments for materials that, although denominated in U.S. dollars, are linked to foreign currency valuations. These commitments generally contain a range for which the price of materials may fluctuate over time given the value of a foreign currency.
The translation of the assets and liabilities of our non-U.S. dollar denominated operations is made using local currency exchange rates as of the end of the year. Translation adjustments are not included in determining net income but are disclosed in Accumulated Other Comprehensive Income ("AOCI") within shareholders’ equity on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the subsidiary takes place. In certain markets, we could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and liquidate our net investment. As of December 31, 2017,2019, cumulative net currency translation adjustments decreasedincreased shareholders’ equity by $260.6$132.9 million.
We monitor and strive to manage risk related to foreign currency exchange rates. Exposures that cannot be
Perrigo Company plc - Item 7A
naturally offset within a local entity to an immaterial amount are often hedged with foreign exchange derivatives or netted with offsetting exposures at other entities (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).entities. We cannot predict future changes in foreign currency movements and fluctuations that could materially impact earnings.
Interest Rate Risk
We are exposed to interest rate changes primarily as a result of interest income earned on our investment of cash on hand and interest expense on borrowings used to finance acquisitions and other general corporate purposes.borrowings.
We have in the past, and may in the future, enter into certain derivative financial instruments related to the management of interest rate risk, when available on a cost-effective basis (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).basis. These instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. We do not use derivative financial instruments for speculative purposes. Gains and losses on hedging transactions are offset by gains and losses on the underlying exposures being hedged. We do not use derivative financial instruments for speculative purposes.
See Item 8. Note 9 and Note 1 for further information regarding our derivative instruments and hedging activities.
Perrigo Company plc - Item 8
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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Perrigo Company plc - Item 8
To the Shareholders and the Board of Directors of Perrigo Company plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Perrigo Company plc (the Company) as of December 31, 2017, 20162019 and 2015,2018, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2018February 27, 2020 expressed an adverseunqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2017-04
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2019 due to the adoption of ASU No. 2017-04, Intangibles - Goodwill and Other.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Perrigo Company plc - Item 8
| Valuation of Goodwill for the RX U.S., BCS, and CSC UK and Australia Reporting Units | ||
| Description of the Matter | At December 31, 2019, the Company’s goodwill was $4,116.7 million. As discussed in Note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. The Company recorded a goodwill impairment charge of $109.2 million for the year ended December 31, 2019 in the RX U.S. reporting unit. Auditing management’s annual goodwill impairment test is complex and highly judgmental due to the significant measurement uncertainty in determining the fair value of the reporting units. In particular, the fair value estimates for the RX U.S., Branded Consumer Self-Care (BCS) and Consumer Self-Care UK and Australia (CSC UK and Australia) reporting units were sensitive to significant assumptions such as revenue growth, operating margins, and discount rate, which are affected by expected future market or economic conditions. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment assessment process. For example, we tested controls over the Company’s forecast process as well as controls over management’s review of the significant assumptions discussed above in estimating the fair values of the reporting units. To test the fair value of the Company’s reporting units, our audit procedures included, among others, assessing methodologies used and testing the significant assumptions discussed above as well as the completeness and accuracy of the underlying data used by the Company. For example, we compared the significant assumptions used by management to current industry and economic trends, changes in the Company’s business model, customer base or product mix and other relevant factors. We performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the assumptions. We also reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and evaluated the implied control premium. We also assessed the historical accuracy of the significant assumptions used by management to determine the fair value of its reporting units. The evaluation of the Company’s methodology and significant assumptions was performed with the assistance of our valuation specialists. | |
| Uncertain Tax Positions | ||
| Description of the Matter | As described in Note 15 to the consolidated financial statements, the Company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. At December 31, 2019, the Company had liabilities of $350.5 million, excluding interest and penalties, relating to uncertain tax positions. Auditing the measurement of the Company’s tax contingencies was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings. | |
Perrigo Company plc - Item 8
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles for uncertain tax positions. Our audit procedures included, among others, assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. To test the Company’s assessment and measurement of uncertain tax positions, we involved our tax professionals to assess whether the uncertain tax positions identified by the Company are more-likely-than-not to be sustained upon audit and, if so, to assist in testing the assumptions made by the Company in measuring the amount of tax benefit that qualifies for recognition. We also used our knowledge of, and experience with, the application of domestic and international income tax laws by the relevant income tax authorities to evaluate the Company’s assessments of whether the uncertain tax position is more-likely-than-not to be sustained and, if so, the potential outcomes that could occur upon an audit by a taxing authority. We tested the completeness and accuracy of the data and calculations used to determine the amount of tax benefit to recognize. We also evaluated the adequacy of the Company’s disclosures to the consolidated financial statements in relation to these matters. | |
| Chargebacks and Product Returns | ||
| Description of the Matter | As described in Note 1 to the consolidated financial statements under the caption “Revenue,” net product sales include estimates of variable consideration for which accruals and allowances have been established. Variable consideration for product sales include chargebacks, which are recorded as Accrued customer programs, and product returns, which are recorded as a reduction to Accounts receivable. Auditing the chargeback liability and product returns reserve was challenging because of the subjectivity of certain assumptions required to estimate these amounts. In particular, the accrual for chargebacks includes estimates for outstanding claims that have occurred but for which the related claim has not yet been paid and for future claims that will be made when the wholesaler inventory is sold to the indirect customer. These estimates are based on historical chargeback experience and estimated wholesaler inventory levels. In addition, the estimate of the product returns reserve is based on historical experience with actual returns and considers other factors such as levels of inventory in the distribution channel, product dating and expiration period, size and maturity of the market prior to a product launch, entrance into the market of additional competition, and changes in formulations. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls addressing the risks of material misstatement for chargebacks and product returns. This included, for example, testing controls over management’s review of the significant assumptions used to calculate the chargeback liabilities and product returns reserves discussed above. To test the Company’s chargeback liability and product returns reserves, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the calculations and evaluating the significant assumptions used by management to estimate its reserves. We also tested the Company's retrospective review of the accuracy of the reserves for product returns, compared the results of the retrospective review to the current year and performed analytical procedures, based on Company and external data sources, to evaluate the completeness of the reserves. | |
Perrigo Company plc - Item 8
| Accounting for Acquisition of Ranir | ||
| Description of the Matter | As disclosed in Note 3 to the consolidated financial statements, the Company completed its acquisition of Ranir Global Holdings, LLC (Ranir) in 2019. The transaction was accounted for as a business combination. The recognition and measurement of the Company’s acquisition of Ranir in the 2019 consolidated financial statements was considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue growth rates, and projected profit margins, for the valuation of acquired assets, including customer relationships. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls addressing the risks of material misstatement over its accounting for the Ranir acquisition. For example, we tested the effectiveness of controls over the estimation process supporting the recognition and measurement of consideration transferred and customer relationships. We also tested the effectiveness of controls over management’s review of the significant assumptions used in the valuation models. To test the Company’s accounting for the Ranir acquisition, we performed audit procedures that included, among others, evaluating management’s identification of assets acquired and liabilities assumed and assessing significant assumptions used for the fair value measurements, including the discount rates, revenue growth rates and projected profit margins used in valuing the customer relationships. We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and significant assumptions included in the fair value estimates. We also evaluated the Company’s disclosures to the consolidated financial statements. | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Grand Rapids, Michigan
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Year Ended | Six Months Ended | Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | June 27, 2015 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||
| Net sales | $ | 4,946.2 | $ | 5,280.6 | $ | 2,632.2 | $ | 4,227.1 | $ | 4,837.4 | $ | 4,731.7 | $ | 4,946.2 | ||||||||||||
| Cost of sales | 2,966.7 | 3,228.8 | 1,553.3 | 2,582.9 | 3,064.1 | 2,900.2 | 2,966.7 | |||||||||||||||||||
| Gross profit | 1,979.5 | 2,051.8 | 1,078.9 | 1,644.2 | 1,773.3 | 1,831.5 | 1,979.5 | |||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Distribution | 87.0 | 88.3 | 47.9 | 67.7 | 96.1 | 94.2 | 87.0 | |||||||||||||||||||
| Research and development | 167.7 | 184.0 | 88.2 | 187.8 | 187.4 | 218.6 | 167.7 | |||||||||||||||||||
| Selling | 598.4 | 665.0 | 325.9 | 319.0 | 567.0 | 595.7 | 598.4 | |||||||||||||||||||
| Administration | 461.1 | 452.2 | 306.8 | 385.3 | 503.0 | 435.9 | 461.1 | |||||||||||||||||||
| Impairment charges | 47.5 | 2,631.0 | 215.6 | 6.8 | 184.5 | 224.4 | 47.5 | |||||||||||||||||||
| Restructuring | 61.0 | 31.0 | 26.9 | 5.1 | 26.3 | 21.0 | 61.0 | |||||||||||||||||||
| Other operating income | (41.4 | ) | — | — | — | |||||||||||||||||||||
| Other operating expense (income) | 4.2 | 5.2 | (41.4 | ) | ||||||||||||||||||||||
| Total operating expenses | 1,381.3 | 4,051.5 | 1,011.3 | 971.7 | 1,568.5 | 1,595.0 | 1,381.3 | |||||||||||||||||||
| Operating income (loss) | 598.2 | (1,999.7 | ) | 67.6 | 672.5 | |||||||||||||||||||||
| Operating income | 204.8 | 236.5 | 598.2 | |||||||||||||||||||||||
| Change in financial assets | 24.9 | 2,608.2 | (57.3 | ) | (78.5 | ) | (22.1 | ) | (188.7 | ) | 24.9 | |||||||||||||||
| Interest expense, net | 168.1 | 216.6 | 89.9 | 146.0 | 121.7 | 128.0 | 168.1 | |||||||||||||||||||
| Other expense (Income), net | (10.1 | ) | 22.7 | 25.2 | 334.2 | |||||||||||||||||||||
| Other (income) expense, net | (66.0 | ) | 6.1 | (10.1 | ) | |||||||||||||||||||||
| Loss on extinguishment of debt | 135.2 | 1.1 | 0.9 | 10.5 | 0.2 | 0.5 | 135.2 | |||||||||||||||||||
| Income (loss) before income taxes | 280.1 | (4,848.3 | ) | 8.9 | 260.3 | |||||||||||||||||||||
| Income tax expense (benefit) | 160.5 | (835.5 | ) | (33.6 | ) | 124.2 | ||||||||||||||||||||
| Net income (loss) | $ | 119.6 | $ | (4,012.8 | ) | $ | 42.5 | $ | 136.1 | |||||||||||||||||
| Income before income taxes | 171.0 | 290.6 | 280.1 | |||||||||||||||||||||||
| Income tax expense | 24.9 | 159.6 | 160.5 | |||||||||||||||||||||||
| Net income | $ | 146.1 | $ | 131.0 | $ | 119.6 | ||||||||||||||||||||
| Earnings (loss) per share | ||||||||||||||||||||||||||
| Earnings per share | ||||||||||||||||||||||||||
| Basic | $ | 0.84 | $ | (28.01 | ) | $ | 0.29 | $ | 0.97 | $ | 1.07 | $ | 0.95 | $ | 0.84 | |||||||||||
| Diluted | $ | 0.84 | $ | (28.01 | ) | $ | 0.29 | $ | 0.97 | $ | 1.07 | $ | 0.95 | $ | 0.84 | |||||||||||
| Weighted-average shares outstanding | ||||||||||||||||||||||||||
| Basic | 142.3 | 143.3 | 145.6 | 139.3 | 136.0 | 137.8 | 142.3 | |||||||||||||||||||
| Diluted | 142.6 | 143.3 | 146.1 | 139.8 | 136.5 | 138.3 | 142.6 | |||||||||||||||||||
| Dividends declared per share | $ | 0.64 | $ | 0.58 | $ | 0.25 | $ | 0.46 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| Year Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Net income | $ | 146.1 | $ | 131.0 | $ | 119.6 | |||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustments | 28.4 | (156.1 | ) | 328.5 | |||||||
| Change in fair value of derivative financial instruments | 28.2 | (5.7 | ) | 9.7 | |||||||
| Change in fair value of investment securities | — | — | (14.1 | ) | |||||||
| Change in post-retirement and pension liability | (1.8 | ) | (5.7 | ) | 10.8 | ||||||
| Other comprehensive income (loss), net of tax | 54.8 | (167.5 | ) | 334.9 | |||||||
| Comprehensive income (loss) | $ | 200.9 | $ | (36.5 | ) | $ | 454.5 | ||||
| Year Ended | Six Months Ended | Year Ended | |||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | June 27, 2015 | ||||||||||||
| Net income (loss) | $ | 119.6 | $ | (4,012.8 | ) | $ | 42.5 | $ | 136.1 | ||||||
| Other comprehensive income: | |||||||||||||||
| Foreign currency translation adjustments | 328.5 | (63.3 | ) | (135.5 | ) | (33.5 | ) | ||||||||
Change in fair value of derivative financial instruments(1) | 9.7 | (5.3 | ) | 2.1 | (0.2 | ) | |||||||||
Change in fair value of investment securities(2) | (14.1 | ) | 8.7 | 9.3 | (5.3 | ) | |||||||||
Change in post-retirement and pension liability(3) | 10.8 | (6.6 | ) | 5.3 | 2.9 | ||||||||||
| Other comprehensive income (loss), net of tax | 334.9 | (66.5 | ) | (118.8 | ) | (36.1 | ) | ||||||||
| Comprehensive income (loss) | $ | 454.5 | $ | (4,079.3 | ) | $ | (76.3 | ) | $ | 100.0 | |||||
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
| December 31, 2017 | December 31, 2016 | December 31, 2015 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Assets | ||||||||||||||||||
| Cash and cash equivalents | $ | 678.7 | $ | 622.3 | $ | 417.8 | $ | 354.3 | $ | 551.1 | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $6.2, $6.3 and $4.5, respectively | 1,130.8 | 1,176.0 | 1,189.0 | |||||||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $6.7 and $6.4, respectively | 1,243.2 | 1,073.1 | ||||||||||||||||
| Inventories | 806.9 | 795.0 | 898.7 | 967.3 | 878.0 | |||||||||||||
| Prepaid expenses and other current assets | 203.2 | 212.0 | 286.1 | 192.1 | 400.0 | |||||||||||||
| Total current assets | 2,819.6 | 2,805.3 | 2,791.6 | 2,756.9 | 2,902.2 | |||||||||||||
| Property, plant and equipment, net | 833.1 | 870.1 | 886.2 | 902.8 | 829.1 | |||||||||||||
| Financial assets | — | 2,350.0 | 5,310.0 | |||||||||||||||
| Goodwill and other indefinite-lived intangible assets | 4,265.7 | 4,163.9 | 7,069.0 | |||||||||||||||
| Other intangible assets, net | 3,290.5 | 3,396.8 | 2,973.1 | |||||||||||||||
| Non-current deferred income taxes | 10.4 | 72.1 | 71.4 | |||||||||||||||
| Operating lease assets | 129.9 | — | ||||||||||||||||
| Goodwill and indefinite-lived intangible assets | 4,185.5 | 4,029.1 | ||||||||||||||||
| Definite-lived intangible assets, net | 2,921.2 | 2,858.9 | ||||||||||||||||
| Deferred income taxes | 5.4 | 1.2 | ||||||||||||||||
| Other non-current assets | 409.5 | 211.9 | 248.3 | 399.7 | 362.9 | |||||||||||||
| Total non-current assets | 8,809.2 | 11,064.8 | 16,558.0 | 8,544.5 | 8,081.2 | |||||||||||||
| Total assets | $ | 11,628.8 | $ | 13,870.1 | $ | 19,349.6 | $ | 11,301.4 | $ | 10,983.4 | ||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||||
| Accounts payable | $ | 450.2 | $ | 471.7 | $ | 555.8 | $ | 520.2 | $ | 474.9 | ||||||||
| Payroll and related taxes | 148.8 | 115.8 | 125.3 | 156.4 | 132.1 | |||||||||||||
| Accrued customer programs | 419.7 | 380.3 | 396.0 | 394.4 | 442.4 | |||||||||||||
| Accrued liabilities | 230.8 | 263.3 | 351.9 | |||||||||||||||
| Other accrued liabilities | 229.2 | 201.3 | ||||||||||||||||
| Accrued income taxes | 116.1 | 32.4 | 62.7 | 32.2 | 96.5 | |||||||||||||
| Current indebtedness | 70.4 | 572.8 | 1,060.5 | 3.4 | 190.2 | |||||||||||||
| Total current liabilities | 1,436.0 | 1,836.3 | 2,552.2 | 1,335.8 | 1,537.4 | |||||||||||||
| Long-term debt, less current portion | 3,270.8 | 5,224.5 | 4,971.6 | 3,365.8 | 3,052.2 | |||||||||||||
| Non-current deferred income taxes | 321.9 | 389.9 | 1,372.7 | |||||||||||||||
| Deferred income taxes | 280.6 | 282.3 | ||||||||||||||||
| Other non-current liabilities | 429.5 | 461.8 | 346.3 | 515.1 | 443.4 | |||||||||||||
| Total non-current liabilities | 4,022.2 | 6,076.2 | 6,690.6 | 4,161.5 | 3,777.9 | |||||||||||||
| Total liabilities | 5,458.2 | 7,912.5 | 9,242.8 | 5,497.3 | 5,315.3 | |||||||||||||
| Commitments and contingencies - Note 16 | ||||||||||||||||||
| Commitments and contingencies - Refer to Note 17 | ||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||
| Controlling interest: | ||||||||||||||||||
| Controlling interests: | ||||||||||||||||||
| Preferred shares, $0.0001 par value per share, 10 shares authorized | — | — | — | — | — | |||||||||||||
| Ordinary shares, €0.001 par value per share, 10,000 shares authorized | 7,892.9 | 8,135.0 | 8,142.6 | 7,359.9 | 7,421.7 | |||||||||||||
| Accumulated other comprehensive income (loss) | 253.1 | (81.8 | ) | (15.3 | ) | |||||||||||||
| Accumulated other comprehensive income | 139.4 | 84.6 | ||||||||||||||||
| Retained earnings (accumulated deficit) | (1,975.5 | ) | (2,095.1 | ) | 1,980.1 | (1,695.5 | ) | (1,838.3 | ) | |||||||||
| Total controlling interest | 6,170.5 | 5,958.1 | 10,107.4 | |||||||||||||||
| Total controlling interests | 5,803.8 | 5,668.0 | ||||||||||||||||
| Noncontrolling interest | 0.1 | (0.5 | ) | (0.6 | ) | 0.3 | 0.1 | |||||||||||
| Total shareholders’ equity | 6,170.6 | 5,957.6 | 10,106.8 | 5,804.1 | 5,668.1 | |||||||||||||
| Total liabilities and shareholders' equity | $ | 11,628.8 | $ | 13,870.1 | $ | 19,349.6 | $ | 11,301.4 | $ | 10,983.4 | ||||||||
| Supplemental Disclosures of Balance Sheet Information | ||||||||||||||||||
| Preferred shares, issued and outstanding | — | — | — | — | — | |||||||||||||
| Ordinary shares, issued and outstanding | 140.8 | 143.4 | 143.1 | 136.1 | 135.9 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Year Ended | Six Months Ended | Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | June 27, 2015 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||
| Cash Flows From (For) Operating Activities | ||||||||||||||||||||||||||
| Net income (loss) | $ | 119.6 | $ | (4,012.8 | ) | $ | 42.5 | $ | 136.1 | |||||||||||||||||
| Adjustments to derive cash flows | ||||||||||||||||||||||||||
| Net income | $ | 146.1 | $ | 131.0 | $ | 119.6 | ||||||||||||||||||||
| Adjustments to derive cash flows: | ||||||||||||||||||||||||||
| Depreciation and amortization | 444.8 | 457.0 | 182.4 | 258.7 | 396.5 | 423.6 | 444.8 | |||||||||||||||||||
| Loss on acquisition-related foreign currency derivatives | — | — | — | 326.4 | ||||||||||||||||||||||
| Gain on sale of business | (71.7 | ) | — | — | ||||||||||||||||||||||
| Share-based compensation | 43.8 | 23.0 | 22.8 | 31.6 | 52.2 | 37.7 | 43.8 | |||||||||||||||||||
| Impairment charges | 47.5 | 2,631.0 | 215.6 | 6.8 | 184.5 | 224.4 | 47.5 | |||||||||||||||||||
| Asset abandonments | 11.0 | — | — | |||||||||||||||||||||||
| Change in financial assets | 24.9 | 2,608.2 | (57.3 | ) | (78.5 | ) | (22.1 | ) | (188.7 | ) | 24.9 | |||||||||||||||
| Loss on extinguishment of debt | 135.2 | 1.1 | 0.9 | 10.5 | 0.2 | 0.5 | 135.2 | |||||||||||||||||||
| Restructuring charges | 61.0 | 31.0 | 26.9 | 5.1 | 26.3 | 21.0 | 61.0 | |||||||||||||||||||
| Deferred income taxes | (48.9 | ) | (990.9 | ) | (120.0 | ) | (16.3 | ) | (43.9 | ) | (17.9 | ) | (48.9 | ) | ||||||||||||
| Amortization of debt premium | (22.4 | ) | (24.7 | ) | (10.2 | ) | 0.2 | (4.4 | ) | (8.1 | ) | (22.4 | ) | |||||||||||||
| Other non-cash adjustments, net | (2.7 | ) | 33.5 | 18.1 | 10.2 | 26.6 | (11.1 | ) | (2.7 | ) | ||||||||||||||||
| Subtotal | 802.8 | 756.4 | 321.7 | 690.8 | 701.3 | 612.4 | 802.8 | |||||||||||||||||||
| Increase (decrease) in cash due to: | ||||||||||||||||||||||||||
| Accounts receivable | 3.2 | (0.6 | ) | 52.5 | (51.1 | ) | (140.7 | ) | 21.0 | 3.2 | ||||||||||||||||
| Inventories | (16.0 | ) | 100.7 | (29.6 | ) | (11.4 | ) | (67.0 | ) | (98.6 | ) | (16.0 | ) | |||||||||||||
| Accounts payable | (39.6 | ) | (75.7 | ) | (194.1 | ) | 120.5 | 17.0 | 28.8 | (39.6 | ) | |||||||||||||||
| Payroll and related taxes | (27.4 | ) | (41.1 | ) | (38.2 | ) | (30.2 | ) | (3.7 | ) | (34.5 | ) | (27.4 | ) | ||||||||||||
| Accrued customer programs | 34.6 | (13.9 | ) | 34.4 | 71.3 | (48.6 | ) | 25.5 | 34.6 | |||||||||||||||||
| Accrued liabilities | (47.8 | ) | (79.5 | ) | 108.1 | 42.8 | (23.2 | ) | (20.9 | ) | (47.8 | ) | ||||||||||||||
| Accrued income taxes | (6.1 | ) | 20.9 | (56.8 | ) | 21.9 | (74.5 | ) | 68.1 | (6.1 | ) | |||||||||||||||
| Other, net | (4.8 | ) | (12.3 | ) | 2.9 | 0.6 | 27.2 | (8.8 | ) | (4.8 | ) | |||||||||||||||
| Subtotal | (103.9 | ) | (101.5 | ) | (120.8 | ) | 164.4 | (313.5 | ) | (19.4 | ) | (103.9 | ) | |||||||||||||
| Net cash from operating activities | 698.9 | 654.9 | 200.9 | 855.2 | 387.8 | 593.0 | 698.9 | |||||||||||||||||||
| Cash Flows From (For) Investing Activities | ||||||||||||||||||||||||||
| Proceeds from royalty rights | 87.3 | 353.7 | 166.3 | 344.6 | 2.9 | 13.7 | 87.3 | |||||||||||||||||||
| Acquisitions of businesses, net of cash acquired | (0.4 | ) | (427.4 | ) | (791.6 | ) | (2,177.8 | ) | (747.7 | ) | — | (0.4 | ) | |||||||||||||
| Asset acquisitions | — | (65.1 | ) | — | (4.0 | ) | (149.1 | ) | (35.6 | ) | — | |||||||||||||||
| Settlement of acquisition-related foreign currency derivatives | — | — | (1.3 | ) | (329.9 | ) | ||||||||||||||||||||
| Proceeds from sale of securities | — | 4.5 | — | — | ||||||||||||||||||||||
| Purchase of investment securities | — | (7.5 | ) | — | ||||||||||||||||||||||
| Proceeds from the Royalty Pharma contingent milestone | 250.0 | — | — | |||||||||||||||||||||||
| Additions to property, plant and equipment | (88.6 | ) | (106.2 | ) | (77.8 | ) | (137.0 | ) | (137.7 | ) | (102.6 | ) | (88.6 | ) | ||||||||||||
| Net proceeds from sale of business and other assets | 154.6 | 69.1 | — | — | ||||||||||||||||||||||
| Net proceeds from sale of business | 182.5 | 5.2 | 154.6 | |||||||||||||||||||||||
Proceeds from sale of the Tysabri® financial asset | 2,200.0 | — | — | — | — | — | 2,200.0 | |||||||||||||||||||
| Other investing, net | (14.8 | ) | (3.6 | ) | (3.7 | ) | 1.8 | 3.0 | — | (14.8 | ) | |||||||||||||||
| Net cash from (for) investing activities | 2,338.1 | (175.0 | ) | (708.1 | ) | (2,302.3 | ) | (596.1 | ) | (126.8 | ) | 2,338.1 | ||||||||||||||
| Cash Flows From (For) Financing Activities | ||||||||||||||||||||||||||
| Borrowings (repayments) of revolving credit agreements and other financing, net | 6.8 | (802.5 | ) | 718.0 | (54.0 | ) | 0.5 | (4.4 | ) | 6.8 | ||||||||||||||||
| Issuances of long-term debt | — | 1,190.3 | — | 2,504.3 | 600.0 | 431.0 | — | |||||||||||||||||||
| Payments on long-term debt | (2,611.0 | ) | (559.2 | ) | (28.3 | ) | (1,823.5 | ) | (476.0 | ) | (482.5 | ) | (2,611.0 | ) | ||||||||||||
| Premium on early debt retirement | (116.1 | ) | (0.6 | ) | — | — | ||||||||||||||||||||
| Premiums on early debt retirement | — | — | (116.1 | ) | ||||||||||||||||||||||
| Deferred financing fees | (4.8 | ) | (2.8 | ) | (0.3 | ) | (28.1 | ) | (1.0 | ) | (2.4 | ) | (4.8 | ) | ||||||||||||
| Issuance of ordinary shares | 0.7 | 8.3 | 4.9 | 1,043.5 | 0.9 | 1.3 | 0.7 | |||||||||||||||||||
| Equity issuance costs | — | (10.3 | ) | — | (35.7 | ) | ||||||||||||||||||||
| Repurchase of ordinary shares | (191.5 | ) | — | (500.0 | ) | — | — | (400.0 | ) | (191.5 | ) | |||||||||||||||
| Cash dividends | (91.1 | ) | (83.2 | ) | (36.3 | ) | (64.8 | ) | (112.4 | ) | (104.9 | ) | (91.1 | ) | ||||||||||||
| Other financing, net | 2.3 | (8.7 | ) | (8.4 | ) | (19.3 | ) | (10.2 | ) | (10.0 | ) | 2.3 | ||||||||||||||
| Net cash from (for) financing activities | (3,004.7 | ) | (268.7 | ) | 149.6 | 1,522.4 | 1.8 | (571.9 | ) | (3,004.7 | ) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 24.1 | (6.7 | ) | (10.2 | ) | (89.2 | ) | 9.7 | (21.9 | ) | 24.1 | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 56.4 | 204.5 | (367.8 | ) | (13.9 | ) | (196.8 | ) | (127.6 | ) | 56.4 | |||||||||||||||
| Cash and cash equivalents, beginning of period | 622.3 | 417.8 | 785.6 | 799.5 | 551.1 | 678.7 | 622.3 | |||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 678.7 | $ | 622.3 | $ | 417.8 | $ | 785.6 | $ | 354.3 | $ | 551.1 | $ | 678.7 | ||||||||||||
Perrigo Company plc - Item 8
| Year Ended | Six Months Ended | Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | June 27, 2015 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||||||||||||||||||||
| Cash paid/received during the year for: | ||||||||||||||||||||||||||
| Interest paid | $ | 187.6 | $ | 205.1 | $ | 84.2 | $ | 143.2 | $ | 136.8 | $ | 133.8 | $ | 187.6 | ||||||||||||
| Interest received | $ | 9.3 | $ | 1.2 | $ | 0.7 | $ | 1.1 | $ | 15.1 | $ | 5.0 | $ | 9.3 | ||||||||||||
| Income taxes paid | $ | 186.9 | $ | 139.5 | $ | 87.8 | $ | 131.0 | $ | 136.2 | $ | 144.2 | $ | 186.9 | ||||||||||||
| Income taxes refunded | $ | 3.6 | $ | 9.3 | $ | 1.7 | $ | 9.6 | $ | 28.0 | $ | 5.1 | $ | 3.6 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except per share amounts)
| Ordinary Shares Issued | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total | Ordinary Shares Issued | Accumulated Other Comprehensive Income | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance at June 28, 2014 | 133.8 | $ | 6,678.2 | $ | 139.6 | $ | 1,902.6 | $ | 8,720.4 | |||||||||||||||||||||||||||
| Balance at December 31, 2016 | 143.4 | $ | 8,135.0 | $ | (81.8 | ) | $ | (2,095.1 | ) | $ | 5,958.1 | |||||||||||||||||||||||||
| Net income | — | — | — | 136.1 | 136.1 | — | — | — | 119.6 | 119.6 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | (36.1 | ) | — | (36.1 | ) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | 334.9 | — | 334.9 | |||||||||||||||||||||||||||||||
| Issuance of ordinary shares under: | ||||||||||||||||||||||||||||||||||||
| Equity offering | 6.8 | 1,035.0 | — | — | 1,035.0 | |||||||||||||||||||||||||||||||
| Omega acquisition | 5.4 | 904.9 | — | — | 904.9 | |||||||||||||||||||||||||||||||
| Stock options | 0.2 | 8.5 | — | — | 8.5 | 0.1 | 0.7 | — | — | 0.7 | ||||||||||||||||||||||||||
| Restricted stock plan | 0.2 | — | — | — | — | 0.1 | — | — | — | — | ||||||||||||||||||||||||||
| Compensation for stock options | — | 6.9 | — | — | 6.9 | — | 8.9 | — | — | 8.9 | ||||||||||||||||||||||||||
| Compensation for restricted stock | — | 24.7 | — | — | 24.7 | — | 34.9 | — | — | 34.9 | ||||||||||||||||||||||||||
| Cash dividends, $0.46 per share | — | — | — | (64.8 | ) | (64.8 | ) | |||||||||||||||||||||||||||||
| Tax effect from stock transactions | — | 7.0 | — | — | 7.0 | |||||||||||||||||||||||||||||||
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | (7.6 | ) | — | — | (7.6 | ) | ||||||||||||||||||||||||||||
| Equity issuance costs | — | (35.7 | ) | — | — | (35.7 | ) | |||||||||||||||||||||||||||||
| Balance at June 27, 2015 | 146.3 | 8,621.9 | 103.5 | 1,973.9 | 10,699.3 | |||||||||||||||||||||||||||||||
| Cash dividends, $0.64 per share | — | (91.1 | ) | — | — | (91.1 | ) | |||||||||||||||||||||||||||||
| Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (4.0 | ) | — | — | (4.0 | ) | ||||||||||||||||||||||||||||
| Repurchases of ordinary shares | (2.7 | ) | (191.5 | ) | — | — | (191.5 | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 140.8 | 7,892.9 | 253.1 | (1,975.5 | ) | 6,170.5 | ||||||||||||||||||||||||||||||
| Adoption of new accounting standards | — | — | (1.0 | ) | 6.2 | 5.2 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | 42.5 | 42.5 | — | — | — | 131.0 | 131.0 | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | (118.8 | ) | — | (118.8 | ) | — | — | (167.5 | ) | — | (167.5 | ) | ||||||||||||||||||||||
| Issuance of ordinary shares under: | ||||||||||||||||||||||||||||||||||||
| Stock options | 0.1 | 4.9 | — | — | 4.9 | 0.1 | 1.3 | — | — | 1.3 | ||||||||||||||||||||||||||
| Restricted stock plan | 0.1 | — | — | — | — | 0.2 | — | — | — | — | ||||||||||||||||||||||||||
| Compensation for stock options | — | 2.5 | — | — | 2.5 | — | 8.1 | — | — | 8.1 | ||||||||||||||||||||||||||
| Compensation for restricted stock | — | 20.3 | — | — | 20.3 | — | 29.6 | — | — | 29.6 | ||||||||||||||||||||||||||
| Cash dividends, $0.25 per share | — | — | — | (36.3 | ) | (36.3 | ) | |||||||||||||||||||||||||||||
| Tax effect from stock transactions | — | 3.3 | — | — | 3.3 | |||||||||||||||||||||||||||||||
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | (10.3 | ) | — | — | (10.3 | ) | ||||||||||||||||||||||||||||
| Cash dividends, $0.76 per share | — | (104.9 | ) | — | — | (104.9 | ) | |||||||||||||||||||||||||||||
| Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (5.3 | ) | — | — | (5.3 | ) | ||||||||||||||||||||||||||||
| Repurchases of ordinary shares | (3.3 | ) | (500.0 | ) | — | — | (500.0 | ) | (5.1 | ) | (400.0 | ) | — | — | (400.0 | ) | ||||||||||||||||||||
| Balance at December 31, 2015 | 143.1 | 8,142.6 | (15.3 | ) | 1,980.1 | 10,107.4 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 135.9 | 7,421.7 | 84.6 | (1,838.3 | ) | 5,668.0 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | (4,012.8 | ) | (4,012.8 | ) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | (66.5 | ) | — | (66.5 | ) | |||||||||||||||||||||||||||||
| Adoption of new accounting standards | — | — | — | (3.3 | ) | (3.3 | ) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 146.1 | 146.1 | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | 54.8 | — | 54.8 | |||||||||||||||||||||||||||||||
| Issuance of ordinary shares under: | ||||||||||||||||||||||||||||||||||||
| Stock options | 0.2 | 8.3 | — | — | 8.3 | — | 0.9 | — | — | 0.9 | ||||||||||||||||||||||||||
| Restricted stock plan | 0.2 | — | — | — | — | 0.3 | — | — | — | — | ||||||||||||||||||||||||||
| Compensation for stock options | — | 5.0 | — | — | 5.0 | — | 4.7 | — | — | 4.7 | ||||||||||||||||||||||||||
| Compensation for restricted stock | — | 18.0 | — | — | 18.0 | — | 50.6 | — | — | 50.6 | ||||||||||||||||||||||||||
| Cash dividends, $0.58 per share | — | (20.8 | ) | — | (62.4 | ) | (83.2 | ) | ||||||||||||||||||||||||||||
| Tax effect from stock transactions | — | (1.5 | ) | — | — | (1.5 | ) | |||||||||||||||||||||||||||||
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | (6.3 | ) | — | — | (6.3 | ) | ||||||||||||||||||||||||||||
| Equity issuance costs | — | (10.3 | ) | — | — | (10.3 | ) | |||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 143.4 | 8,135.0 | (81.8 | ) | (2,095.1 | ) | 5,958.1 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 119.6 | 119.6 | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | 334.9 | — | 334.9 | |||||||||||||||||||||||||||||||
| Stock options | 0.1 | 0.7 | — | — | 0.7 | |||||||||||||||||||||||||||||||
| Restricted stock plan | 0.1 | — | — | — | — | |||||||||||||||||||||||||||||||
| Compensation for stock options | — | 8.9 | — | — | 8.9 | |||||||||||||||||||||||||||||||
| Cash dividends, $0.82 per share | — | (112.4 | ) | — | — | (112.4 | ) | |||||||||||||||||||||||||||||
| Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (5.6 | ) | — | — | (5.6 | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 136.1 | $ | 7,359.9 | $ | 139.4 | $ | (1,695.5 | ) | $ | 5,803.8 | ||||||||||||||||||||||||||
| Ordinary Shares Issued | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||
| Shares | Amount | |||||||||||||||||
| Compensation for restricted stock | — | 34.9 | — | — | 34.9 | |||||||||||||
| Cash dividends, $0.64 per share | — | (91.1 | ) | — | — | (91.1 | ) | |||||||||||
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | (4.0 | ) | — | — | (4.0 | ) | ||||||||||
| Repurchases of ordinary shares | (2.7 | ) | (191.5 | ) | — | — | (191.5 | ) | ||||||||||
| Balance at December 31, 2017 | 140.8 | $ | 7,892.9 | $ | 253.1 | $ | (1,975.5 | ) | $ | 6,170.5 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
Note 1
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information
The Company
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We are a leading global healthcare company, delivering valuededicated to our customers and consumersmaking lives better by providing bringing “Quality, Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business modelSelf-Care Products™” that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe weconsumers trust everywhere they are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market.sold. We are a leading provider of branded OTC products throughout Europe,over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and gels, as well as nasal sprays and injection ("extended topical") prescription drugs. We are headquartered in Ireland, and sell our products primarily in North America and Europe, as well as in other markets, including Australia, Israel and China.sprays.
Basis of Presentation
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to beginbegins on January 1 and endends on December 31 of each year. As a result of our change in yearWe end this report on Form 10-K discloses the results of our operations for:
Segment Reporting
to the Prescription Pharmaceuticals("RX"),comprises segment and we made certain adjustments to our U.S. Prescription Pharmaceuticals business.
| • | Consumer Self-Care Americas ("CSCA"), formerly Consumer Healthcare Americas, comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
| • | Consumer Self-Care International ("CSCI"),formerly Consumer Healthcare International, comprises our branded consumer self-care business primarily in Europe and Australia, our consumer-focused business in the United Kingdom and parts of Asia, and our liquid licensed products business in the United Kingdom. |
| • | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S. and our pharmaceuticals and diagnostic businesses in Israel, which were previously in our CSCI segment. |
Principles of Consolidation
The consolidated financial statements include our accounts and accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Unconsolidated Variable Interest Entities
We have research and development ("R&D") arrangements with certain biotechnology companies that we determined to be variable interest entities ("VIEs"). We did not consolidate the VIEs in our financial statements because we lack the power to direct the activities that most significantly impact their economic performance and thus are not considered the primary beneficiaries of these entities. These arrangements provide us with certain rights and obligations to purchase product candidates from the VIEs, dependent upon the outcome of the development activities.
Perrigo Company plc - Item 8
Note 1
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions, which affect the reported earnings, financial position and various disclosures. Although the estimates are considered reasonable, actual results could differ from the estimates.
Non-U.S. Operations
We translate our non-U.S. dollar-denominated operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of Accumulated Other Comprehensive Incomeother comprehensive income (loss) ("AOCI"). Gains or losses from foreign currency transactions are included in Other (income) expense, net.
Product Revenue
We generally record revenues fromrecognize product sales when the goods are shippedrevenue for our contract performance obligations at a point in time, typically upon shipment or delivery of products to customers. For point in time customers for which control transfers on delivery to the customer. For customers with Freecustomer due to free on Boardboard destination terms a provision(“FOB”), an adjustment is recorded to exclude shipments estimated to be in-transit to these customersdefer revenue recognition over an estimate of days until control transfers at the endpoint of delivery. Where we recognize revenue at a point in time, the transfer of title is the primary indicator that control has transferred. In other limited instances, primarily relating to those contracts that relate to contract manufacturing performed for our customers and certain store branded products, control transfers as the product is manufactured. Control is deemed to transfer over time for these contracts as the product does not have an alternative use and we have a contractual right to payment for performance completed to date. Revenue for contract manufacturing contracts is recognized over the transfer period using an input method that measures progress towards completion of the reporting period. Aperformance obligation as costs are incurred. For store branded product revenue recognized over time, an output method is used to recognize revenue when production of a unit is completed because product customization occurs when the product is packaged as a finished good under the store brand label of the customer.
Net product sales allowance is recorded and accounts receivable are reduced as revenues are recognizedinclude estimates of variable consideration for estimated losses on credit sales due to customer claims for discounts, price discrepancies, returned goods and other items. Revenue is also reduced for any contractual customer program arrangements and related liabilities are recorded concurrently.
We receive payments from serviceour customers based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. In most cases, the timing of the unconditional right to payment aligns with shipment or delivery of the product and royalty arrangements, including revenues from collaborative agreements, consist primarilythe recognition of royalty payments, paymentsrevenue; however, for R&D services, up-front fees and milestone payments. If an arrangement requires the delivery or performance of multiple deliverables or service elements, we determine whether the individual elements represent separate units of accounting. If the separate elements represent separate units of accounting, we recognize the revenue associated with each element separately andthose customers where revenue is allocated among elements based on their relative selling prices. Ifrecognized at a time prior to shipment or delivery due to over time revenue recognition, a contract asset is recorded and is reclassified to accounts receivable when it becomes unconditional under the elements within a multiple deliverable arrangement arecontract upon shipment or delivery to the customer.
Perrigo Company plc - Item 8
Note 1
Our performance obligations are generally expected to be fulfilled in less than one year. Therefore, we do not considered separate unitsprovide quantitative information about remaining performance obligations.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of accounting, the delivery of an individual element is considered not to have occurred if there are undelivered elements that are considered essentialpromised products to the arrangement.customer will be one year or less, which is the case with substantially all customers.
Shipping and handling costs billed to customers are included in netNet sales. Conversely, shipping and handling expenses we incur are included in costCost of sales.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of demand deposits and other short-term investments with maturities of three months or less at the date of purchase. The carrying amount of cash and cash equivalents approximates its fair value.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in first-out method. Costs include material and conversion costs. Inventory related to R&D is expensed at the point when it is determined the materials have no alternative future use.
We maintain reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of the inventory and its estimated net realizable value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, products on quality hold, current and future customer demand and market conditions. Changes in these conditions may result in additional reserves (refer to Note 56).
Investments
Equity Method Investments
The equity method of accounting is used for unconsolidated entities over which we have significant
influence; generally, this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we record the investments at carrying value and adjust for a proportionate share of the profits and losses of these entities each period. We evaluate our equity method investments for recoverability. If we determine that a loss in the value of an investment is other than temporary, the investment is written down to its estimated fair value. Any such losses are recorded in Other expense, net. Evaluations of recoverability are based primarily on projected cash flows. Due
For more information on our investments, refer to uncertainties in the estimation process, actual results could differ from such estimates. Equity method investments are recorded in Other non-current assets (refer to Note 78).
Perrigo Company plc - Item 8
Note 1
Derivative Instruments
On January 1, 2019, we adopted Accounting Standards Update No. 2017-12 Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") using a modified retrospective approach. Among other provisions, the new standard required modifications to existing presentation and disclosure requirements on a prospective basis. As such, disclosures for the year ended December 31, 2018 conform to the disclosure requirements prior to the adoption of ASU 2017-12.
Prior to the adoption of ASU 2017-12, we were required to separately measure and reflect the amount by which the hedging instrument did not offset the changes in the fair value or cash flows of hedged items, which was referred to as the ineffective amount. We assessed hedge effectiveness on a quarterly basis and recorded the gain or loss related to the ineffective portion of derivative instruments, if any, in Other (income) expense, net on the Consolidated Statements of Operations. Pursuant to the provisions of ASU 2017-12, we are no longer required to separately measure and recognize hedge ineffectiveness. Therefore, we no longer recognize hedge ineffectiveness separately on our Consolidated Statements of Operations, but instead recognize the entire change in the fair value of:
Cash flow hedges included in the assessment of hedge effectiveness in Other Comprehensive Income ("OCI"). The amounts recorded in OCI will subsequently be reclassified to earnings in the same line item on the Consolidated Statements of Operations as impacted by the hedged item when the hedged item affects earnings; and
Fair value hedges included in the assessment of hedge effectiveness in the same line item on the Consolidated Statements of Operations that is used to present the earnings effect of the hedged item.
Prior to the adoption of ASU 2017-12, we excluded option premiums and forward points (excluded components) from our assessment of hedge effectiveness for our foreign exchange cash flow hedges. We recognized all changes in fair value of the excluded components in Other (income) expense, net, on the Consolidated Statements of Operations. The amendments in ASU 2017-12 continue to allow those components to be excluded from the assessment of hedge effectiveness and add cross-currency basis spread as an allowable excluded component for cash flow and fair value hedges. The provisions of ASU 2017-12 allow a policy election to either continue to recognize changes in the fair value of the excluded components currently in earnings or to recognize the initial value of the excluded component using an amortization approach. For our cash flow hedges, we have elected to recognize the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, within the same line item on the Consolidated Statements of Operations that is used to present the earnings effect of the hedged item. The cumulative effect adjustment between Accumulated Other Comprehensive Income ("AOCI") and Retained earnings (accumulated deficit) from applying this policy on existing hedges at the date of adoption was immaterial.
We record derivative instruments on the balance sheet on a gross basis as either an asset or liability measured at fair value (refer to Note 87). Additionally, changes in a derivative's fair value, which are measured at the end of each period, are recognized in earnings unless specifica derivative can be designated in a qualifying hedging relationship. All realized and unrealized gains and losses are included within operating activities in the Consolidated Statements of Cash Flows.
Designated derivatives meet hedge accounting criteria, are met. If hedge accounting criteria are met for cash flow hedges,which means the changes in a derivative’s fair value areof the hedge is recorded in shareholders’ equity as a component of other comprehensive income ("OCI"),OCI, net of tax. TheseThe deferred gains and losses are recognized in income in the period in which the hedged item and hedging instrument affectaffects earnings. Any ineffective portionAll of our designated derivatives are assessed for hedge effectiveness quarterly.
We also have economic non-designated derivatives that do not meet hedge accounting criteria. These derivative instruments are adjusted to current market value at the change in fair value is immediately recognized inend of each period through earnings. Gains or losses on these instruments are offset substantially by the remeasurement adjustment on the hedged item.
We are exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. It is our policy to manage our credit risk on these transactions by dealing only with financial institutions having a long-term credit rating of "A""Aa3" or better and by distributing the contracts among several financial institutions to
Perrigo Company plc - Item 8
Note 1
diversify credit concentration risk. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument. The maximum term of our forward currency exchange contracts is 18 months.
We enter into certain derivative financial instruments, when available on a cost-effective basis, to mitigate our risk associated with changes in interest rates and foreign currency exchange rates as follows:
Interest rate risk management - We are exposed to the impact of interest rate changes through our cash investments and borrowings. We utilize a variety of strategies to manage the impact of changes in interest rates including using a mix of debt maturities along with both fixed-rate and variable-rate debt. In addition, we may enter into treasury-lock agreements and interest rate swap agreements on certain investing and borrowing transactions to manage our exposure to interest rate changes and our overall cost of borrowing.
Foreign currency exchange risk management - We conduct business in several major currencies other than the U.S. dollar and are subject to risks associated with changing foreign exchange rates. Our objective is to reduce cash flow volatility associated with foreign exchange rate changes on a consolidated basis to allow management to focus its attention on business operations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments, and anticipated foreign currency sales and expenses.
Interest rate swaps - Interest rate swap agreements are contracts to exchange floating rate for fixed rate payments (or vice versa) over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
Cross currency swaps - In a cross currency swap, interest payments and principal in one currency are exchanged for principal and interest payments in a different currency. Interest payments are exchanged at fixed intervals during the life of the agreement. Changes in the fair value of these swaps are recorded in equity as a component of AOCI in the same manner as foreign currency translation adjustments. In assessing the effectiveness of these hedges, we use a method based on changes in spot rates to measure the impact of the foreign currency exchange rate fluctuations on both our foreign subsidiary net investment and the related swap. Under this method, changes in the fair value of the hedging instrument, other than those due to changes in the spot rate, are initially recorded in AOCI as a translation adjustment. The excluded component is recognized on a systematic and rational basis by accruing the swap payments and receipts within Interest expense, net. Changes in the fair value associated with the effective portion (i.e. those changes due to the spot rate) are recorded in AOCI as a translation adjustment and are released and recognized in earnings only upon the sale or liquidation of the hedged net investment.
All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. Gains and losses related to the derivative instruments are expected to be offset largely by gains and losses on the original underlying asset or liability. We do not use derivative financial instruments for speculative purposes.
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Operations in Other (income) expense, net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. dollar-translated amounts of each Income Statement account in current and/or future periods.
Property, Plant and Equipment, net
Property, plant and equipment, net areis recorded at cost and areis depreciated using the straight-line method. Useful lives for financial reporting range from 3 to 20 years for machinery and equipment and 10 to 45 years for
Perrigo Company plc - Item 8
Note 1
buildings.Maintenance and repair costs are charged to earnings, while expenditures that increase asset lives are capitalized. Depreciation expense includes amortization of assets recorded under capitalfinance leases and totaled $95.2$91.0 million, $100.2$90.0 million, $53.8 million, and$84.395.2 million for the years ended December 31, 2017and2019, December 31, 2016, the six months ended2018, and December 31, 2015, and the year ended June 27, 2015,2017, respectively.
We held the following property, plant and equipment, net (in millions):
| December 31, 2019 | December 31, 2018 | ||||||
| Land | $ | 50.4 | $ | 49.0 | |||
| Buildings | 578.7 | 552.3 | |||||
| Machinery and equipment | 1,195.8 | 1,079.3 | |||||
| Gross property, plant and equipment | 1,824.9 | 1,680.6 | |||||
| Less accumulated depreciation | (922.1 | ) | (851.5 | ) | |||
| Property, plant and equipment, net | $ | 902.8 | $ | 829.1 | |||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||
| Land | $ | 45.5 | $ | 45.0 | $ | 47.5 | |||||
| Buildings | 514.3 | 520.2 | 508.2 | ||||||||
| Machinery and equipment | 1,078.6 | 1,094.7 | 1,103.3 | ||||||||
| Gross property, plant and equipment | 1,638.4 | 1,659.9 | 1,659.0 | ||||||||
| Less accumulated depreciation | (805.3 | ) | (789.8 | ) | (772.8 | ) | |||||
| Property, plant and equipment, net | $ | 833.1 | $ | 870.1 | $ | 886.2 | |||||
Leases
We adopted ASU 2016-02, Leases, as of January 1, 2019, using the modified retrospective transition approach, with a cumulative-effect adjustment to the opening balance of retained earnings as of the effective date. The financial results reported in periods prior to 2019 are unchanged. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification.
Adoption of the new standard resulted in additional operating lease liabilities and lease assets, including the transition of existing capital lease liabilities and lease assets to finance classification, of approximately $166.5 million and $164.0 million, respectively, as of January 1, 2019. Upon adoption, there were two primary reasons for the differences between the lease assets and liabilities recognized: (1) the transition requirement to reduce the operating lease asset carrying value by the deferred lease liabilities that existed prior to the adoption date; and (2) the transition of capital leases to finance leases which occurred at their existing carrying values. Additionally, historical build-to-suit assets and liabilities were removed on transition and recorded as an adjustment to retained earnings, net of deferred tax impact. The standard did not materially impact our consolidated net income or cash flow classification.
We lease certain office buildings, warehouse facilities, vehicles, and plant, office, and computer equipment. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
We evaluate arrangements at inception to determine if lease components are included. An arrangement includes a lease component if it identifies an asset and we have control over the asset. For new leases beginning January 1, 2019 or later, we have elected not to separate lease components from the non-lease components included in an arrangement when measuring the leased asset and leased liability for all asset classes.
Lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for leases on a straight-line basis over the lease term. We apply the portfolio approach to certain groups of computer equipment and vehicle leases when the term, classification, and asset type are identical. The discount rate selected is the incremental borrowing rate we would obtain for a secured financing of the lease asset over a similar term.
Many of our leases include one or more options to extend the lease term. Certain leases also include options to terminate early or purchase the leased property, all of which are executed at our sole discretion. Optional periods may be included in the lease term and measured as part of the lease asset and lease liability if we are reasonably certain to exercise our right to use the leased asset during the optional periods. We generally consider renewal options to be reasonably certain of execution and included in the lease term when significant leasehold improvements have been made by us to the leased assets. The depreciable lives of assets and leasehold
Perrigo Company plc - Item 8
Note 1
Certain of our lease agreements include contingent rental payments based on per unit usage over contractual levels (e.g., miles driven or machine hours used) and others include rental payments adjusted periodically for market reviews or inflationary indexes. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For more information on our leases, refer to be received. This asset is classified as Level 3 assets within the fair value hierarchy, as our valuation estimates utilize significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Critical estimates in determining the fair value are the underlying revenue assumptions of Tysabri® sales and the discount rates. The revenue assumptions are impacted by product demand and market growth assumptions, inventory target levels, product approval, currency movements and pricing assumptions. Factors that could cause a change in estimates of future cash flows include a change in estimated market size, entry of a competitive product that would erode market share, manufacturing and approval of a biosimilar equivalent product, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product, or a change in the number of treatments.Note 10.
Goodwill and Intangible Assets
Goodwill
Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received.acquired. Goodwill is tested for impairment annually on the first day of our fourth quarter, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists.
The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected discounted future cash flows. Changes in these estimates may result in the recognition of an impairment loss. Our annual impairment tests were performed as of October 1, 2017, October 2, 2016, September 27, 2015, and March 29, 2015,We have 6 reporting units that are evaluated for the years ended December 31, 2017 and December 31, 2016, the six months ended December 31, 2015, and the year endedJune 27, 2015, respectively.impairment.
Intangible Assets
We have intangible assets that we have acquired through various business acquisitions and include trademarks, trade names and brands, in-process research and development ("IPR&D"), developed product technology/formulation and product rights, distribution and license agreements, customer relationships and distribution networks, and non-compete agreements. The assets are typically valued initially valued using one of the following valuation methods:
We test indefinite-lived trademarks, trade names, and brands for impairment quarterly,annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists, by comparing the carrying value of the assets to their estimated fair values. An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value.
Definite-lived intangible assets consist of a portfolio of developed product technology/formulation and product rights, distribution and license agreements, customer relationships, non-compete agreements, and certain trademarks, trade names, and brands. The assets are amortized on either a straight-line basis or proportionately to the benefits derived from those relationships or agreements. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We also review all other long-lived assets that have finite lives and that are not held for sale for impairment when indicators of impairment are evident by comparing the carrying value of the assets to their estimated future undiscounted cash flows.
IPR&D assets are recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated R&D efforts. If the associated R&D is completed, the IPR&D asset becomes a definite-lived intangible asset and is amortized over the asset's assigned useful life. If it is abandoned, an impairment loss is recorded.
Goodwill, indefinite-lived intangible asset, and definite-lived intangible asset impairments are recorded in Impairment charges on the Consolidated Statement of Operations. See Note 34 for further information on our goodwill and intangible assets.
Perrigo Company plc - Item 8
Note 1
Share-Based Awards
We measure and record compensation expense for all share-based awards based on estimated grant date fair values, and net of any estimated forfeituresvalues. For awards with only service conditions that are based on graded vesting schedules, we recognize the compensation expense on a straight-line basis over the vestingentire award. Forfeitures on share-based awards are recognized in compensation expense in the period of the awards. Forfeiture rates are estimated at the grant date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates.which they occur.
We estimate the fair value of stock option awards granted based on the Black-Scholes option pricing model, which requires the use of subjective and complex assumptions. These assumptions include estimating the expected term that awards granted are expected to be outstanding, the expected volatility of our stock price for a period commensurate with the expected term of the related options, and the risk-free rate with a maturity closest to the expected term of the related awards. Restricted stock and restricted stock units are valued based on our stock price on the day the awards are granted. The estimated fair value of outstanding Relative Total Shareholder Return performance units (“RTSR”) is based on the grant date fair value of RTSR awards using a Monte Carlo simulation, which includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends (refer to Note 1213).
Income Taxes
We record deferred income tax assets and liabilities on the balance sheet as noncurrent based upon the difference between the financial reporting and the tax reporting basis of assets and liabilities using the enacted tax rates. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
We have provided for income taxes for certain earnings of certain foreign subsidiaries which have not been
deemed to be permanently reinvested. For those foreign subsidiaries we have deemed to be permanently reinvested, we have provided no further tax provision.
We record reserves for uncertain tax positions to the extent it is more likely than not that the tax authority position will be sustained on audit, based on the technical merits of the position. Periodic changes in reserves for uncertain tax positions are reflected in the provision for income taxes. We include interest and penalties attributable to uncertain tax positions and income taxes as a component of our income tax provision (refer to Note 1415).
Legal Contingencies
We are involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range and no amount within that range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters (refer to Note 1617). We alsodo not incorporate insurance recoveries into our reserves for legal contingencies. We separately record anyreceivables for amounts due under insurance policies when we consider the realization of recoveries that arefor claims to be probable, of occurring.which may be different than the timing in which we establish the loss reserves.
Research and Development
All R&D costs, including payments related to products under development and research consulting agreements, are expensed as incurred. We incur costs throughout the development cycle, including costs for research, clinical trials, manufacturing validation, and other pre-commercialization approval costs that are included in R&D. We may continue to make non-refundable payments to third parties for new technologies and for R&D work that has been completed. These payments may be expensed at the time of payment depending on the nature of the payment made. R&D expense was $167.7$187.4 million, $184.0 million, $88.2$218.6 million, and $187.8$167.7 million, for the years ended December 31, 2017,2019, December 31, 2018 and December 31, 2016,2017, respectively. During the six months endedDecember 31, 2015 and the year ended June 27, 2015, respectively.
Perrigo Company plc - Item 8
Note 1
We actively collaborate with other pharmaceutical companies to develop, manufacture and market certain products or groups of products. We may choose to enter into these types of agreements to, among other things, leverage our or others’ scientific research and development expertise or utilize our extensive marketing and distribution resources. Our policy on accounting for costs of strategic collaborations determines the timing of the recognition of certain development costs. In addition, this policy determines whether the cost is classified as a development expense or capitalized as an asset. Management is required to form judgments with respect to the commercial status of such products in determining whether development costs meet the criteria for immediate expense or capitalization. For example, when we acquire certain products for which there is already an Abbreviated New Drug Application ("ANDA") or New Drug Application ("NDA") approval directly related to the product, and there is net realizable value based on projected sales for these products, we capitalize the amount paid as an intangible asset. If we acquire product rights that are in the development phase and as to which we have no assurance that the third party will successfully complete its development milestones, we expense the amount paid (refer to Note 1718 for more information on our current collaboration agreements)).
Advertising Costs
| Year Ended | ||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||
| $ | 142.8 | $ | 159.2 | $ | 145.3 | |||||
| Year Ended | Six Months Ended | Year Ended | ||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | June 27, 2015 | |||||||||||
| $ | 145.3 | $ | 155.9 | $ | 77.5 | $ | 55.7 | |||||||
Earnings per Share ("EPS")
Basic EPS is calculated using the weighted-average number of ordinary shares outstanding during each period. It excludes both the dilutive effects of additional common shares that would have been outstanding if the shares issued under stock incentive plans had been exercised and the dilutive effect of restricted shares and restricted share units, to the extent those shares and units have not vested. Diluted EPS is calculated including the effects of shares and potential shares issued under stock incentive plans, following the treasury stock method.
Defined Benefit Plans
We operate a number of defined benefit plans for employees globally.
Two significant assumptions, the discount rate and the expected rate of return on plan assets, are important elements of expense and liability measurement. We evaluate these assumptions annually. Other assumptions involve employee demographic factors, such as retirement patterns, mortality, turnover, and the rate of compensation increase.
The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated periodically by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of either high quality corporate bonds or long term government bonds depending on the depth and liquidity of the high quality corporate bond market in the different geographies where we have pension liabilities. The bonds are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.
Actuarial gains and losses are recognized on the Consolidated Statement of Operations using the corridor method. Under the corridor method, to the extent that any cumulative unrecognized net actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets, that portion is recognized over the expected average remaining working lives of the plan participants. Otherwise, the net actuarial gain or loss is recorded in OCI. We recognize the funded status of benefit plans on the
Perrigo Company plc - Item 8
Note 1
Consolidated Balance Sheets. In addition, we recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic pension cost of the period as a component of OCI (refer to Note 1516).
Recent Accounting Standard Pronouncements
Below are recent accounting standard updatesAccounting Standard Updates ("ASU") that we have adopted or are still assessing to determine the effect on our Consolidated Financial Statements. We do not believe that any other recently issued accounting standards could have a material effect on our Consolidated Financial Statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
| Recently Issued Accounting Standards Not Yet Adopted | ||||||
| Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |||
| January 1, | We | |||||
| ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the | ||||||
| January 1, | We | |||||
| hierarchy. | ||||||
ASU 2016-13: Financial | ||||||
| Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ASU 2018-19: Codification Improvements for Topic 326: Measurement of Credit Losses on Financial Instruments ASU 2019-05: Financial Instruments-Credit Losses: Targeted Transition Relief ASU 2019-11: Codification Improvements for Topic 326: Measurement of Credit Losses on Financial Instruments | This guidance changes the impairment model for most financial assets and certain other instruments, replacing the current "incurred loss" approach with an "expected loss" credit impairment model, which will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, and off-balance sheet credit exposures such as letters of credit. | January 1, 2020 | We | |||
| January 1, 2020 | We currently plan to adopt the standard on the effective date. Upon adoption, we do not expect a material impact on the Consolidated Financial Statements. | |||||
Perrigo Company plc - Item 8
Note 1
| Recently Issued Accounting Standards Not Yet Adopted (continued) | ||||||
| Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |||
| ASU 2019-08: Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Share-Based Consideration Payable to a Customer | This guidance requires the application of guidance in Topic 718 when measuring and classifying share-based payments to a customer. | January 1, 2020 | We currently plan to adopt the standard on the effective date. Upon adoption, we do not expect a material impact on the Consolidated Financial Statements. | |||
| ASU 2018-14: Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans | This guidance amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other post-retirement plans. | December 31, 2020 | We are currently evaluating the implications of adoption on our Consolidated Financial Statements. | |||
| ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | This guidance enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. | January 1, 2021 | We are currently evaluating the implications of adoption on our Consolidated Financial Statements. | |||
NOTE 2 - REVENUE RECOGNITION
Revenue is recognized when or as a customer obtains control of promised products. The amount of revenue recognized reflects the consideration we expect to be entitled to receive in exchange for these products.
Disaggregation of Revenue
We generated third-party revenue in the following geographic locations(1) during each of the periods presented below (in millions):
| Year Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| U.S. | $ | 3,225.6 | $ | 3,098.3 | $ | 3,272.3 | |||||
Europe(2) | 1,335.8 | 1,347.6 | 1,343.6 | ||||||||
All other countries(3) | 276.0 | 285.8 | 330.3 | ||||||||
| Total net sales | $ | 4,837.4 | $ | 4,731.7 | $ | 4,946.2 | |||||
(1) The net sales by geography is derived from the location of the entity that sells to a third party.
| (2) | Includes Ireland net sales of $23.4 million, $25.7 million, and $30.4 million for the years ended December 31, 2019, December 31, 2018, and December 31, 2017, respectively. |
(3) Includes revenue generated primarily in Israel, Mexico, Australia, and Canada.
Product Category
We re-aligned our product categories in our CSCA and CSCI segments as of December 31, 2019. The re-alignment standardizes our categories and product level detail to provide consistency. This transformative step will optimize the way in which management reports and evaluates our business.
Perrigo Company plc - Item 8
Note 2
The following is a summary of our revenue by category (in millions), comparative periods reflect the product category re-alignment:
| Year Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
CSCA(1) | |||||||||||
| Upper respiratory | $ | 515.2 | $ | 492.5 | $ | 485.4 | |||||
| Digestive health | 413.9 | 403.6 | 411.5 | ||||||||
| Nutrition | 394.4 | 432.4 | 423.6 | ||||||||
| Pain and sleep-aids | 383.6 | 388.1 | 364.8 | ||||||||
| Healthy lifestyle | 352.4 | 333.6 | 341.0 | ||||||||
| Skincare and personal hygiene | 182.9 | 164.1 | 163.5 | ||||||||
| Oral self-care | 106.4 | — | — | ||||||||
| Animal health | 43.7 | 93.9 | 141.3 | ||||||||
| Vitamins, minerals, and supplements | 28.6 | 26.1 | 38.0 | ||||||||
Other CSCA(2) | 66.6 | 77.3 | 60.8 | ||||||||
| Total CSCA | 2,487.7 | 2,411.6 | 2,429.9 | ||||||||
| CSCI | |||||||||||
| Skincare and personal hygiene | 371.6 | 396.5 | 401.8 | ||||||||
| Upper respiratory | 276.8 | 276.5 | 270.8 | ||||||||
| Vitamins, minerals, and supplements | 180.2 | 187.2 | 177.9 | ||||||||
| Healthy lifestyle | 173.8 | 180.7 | 182.5 | ||||||||
| Pain and sleep-aids | 167.9 | 170.0 | 150.8 | ||||||||
| Oral self-care | 51.2 | 8.9 | 11.0 | ||||||||
| Digestive health | 27.1 | 29.5 | 29.2 | ||||||||
Other CSCI(3) | 133.6 | 150.0 | 182.2 | ||||||||
| Total CSCI | 1,382.2 | 1,399.3 | 1,406.2 | ||||||||
| RX | 967.5 | 920.8 | 1,054.4 | ||||||||
| Other | — | — | 55.7 | ||||||||
| Total net sales | $ | 4,837.4 | $ | 4,731.7 | $ | 4,946.2 | |||||
(1) Includes net sales from our OTC contract manufacturing business.
| (2) | Consists primarily of diagnostic products and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales. |
| (3) | Consists primarily of liquid licensed products, our distribution business and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales. |
While the majority of revenue is recognized at a point in time, certain of our product revenue is recognized on an over time basis. Predominately, over time customer contracts exist in contract manufacturing arrangements, which occur in both the CSCA and CSCI segments. Contract manufacturing revenue was $286.8 million and $300.5 million for the years ended December 31, 2019 and December 31, 2018, respectively.
We also recognize a portion of the store brand OTC product revenues in the CSCA segment on an over time basis; however, the timing difference between over time and point in time revenue recognition for store brand contracts is not significant due to the short time period between the customization of the product and shipment or delivery.
Perrigo Company plc - Item 8
Note 2
Contract Balances
The following table provides information about contract assets from contracts with customers (in millions):
| Balance Sheet Location | December 31, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Short-term contract assets | Prepaid expenses and other current assets | $ | 26.3 | $ | 25.5 | $ | 20.5 | ||||||
NOTE 23 - ACQUISITIONS AND DIVESTITURES
Acquisitions Completed During the Year Ended December 31, 20162019
Prevacid®24HR
On November 29, 2019, we acquired the branded OTC rights to Prevacid®24HR from GlaxoSmithKline for $61.5 million in cash. We capitalized $61.7 million, inclusive of closing costs, as a brand named intangible asset and began amortizing it over a 20-year useful life. Operating results attributable to the product are included within our CSCA segment.
Generic Benzaclin™Product Acquisition
On AugustJuly 2, 2016,2019, we purchased the remaining 60.9% product rights toAbbreviated New Drug Application ("ANDA") for a generic Benzaclin™gel product ("Generic Benzaclin™"),for $49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 and began amortizing it over a 20-year useful life. Operating results attributable to the product are included within our RX segment.
Ranir Global Holdings, LLC
On July 1, 2019, we acquired 100% of the outstanding equity interest in Ranir Global Holdings, LLC ("Ranir"), a privately-held company, for total base consideration of $750.0 million in a debt-free, cash-free transaction. After post-closing adjustments, total cash consideration paid was $747.7 million, net of $11.5 million cash acquired. We funded the transaction with cash on hand and borrowings under the 2018 Revolver (as defined in Note 11).
Ranir is headquartered in Grand Rapids, Michigan and is a leading global supplier of private label and branded oral self-care products. Ranir's U.S. operations are reported in our CSCA segment and its non-U.S. operations are reported in our CSCI segment. During the year ended December 31, 2019, we incurred $15.6 million of general transaction costs (legal, banking and other professional fees). The amounts were recorded in Administration expenses and were not allocated to an operating segment.
The acquisition of Ranir was accounted for as a business combination and has been reported in our Consolidated Statements of Operations as of the acquisition date. From July 1, 2019 through December 31, 2019, Ranir generated Net sales of $151.4 million and had $7.6 million of Net income, which is inclusive of a non-recurring charge of $5.7 million related to inventory costs stepped up to acquisition date fair value.
We are in the process of finalizing the allocation of goodwill and other identifiable assets to their respective tax jurisdictions. As a result, the deferred tax balance sheet amounts remain subject to adjustments once the allocation is complete. Additionally, we are finalizing the useful lives of acquired property, plant and equipment. The provisional acquisition amounts recognized for deferred taxes and the useful lives of property, plant and equipment will be finalized as soon as possible but no later than one year from the acquisition date. The final determination may result in tax bases that differ from the preliminary amount of deferred taxes and goodwill recognized, and may result in measurement period adjustments to the depreciation recorded subsequent to acquisition.
Perrigo Company plc - Item 8
Note 3
The following table summarizes the consideration paid for Ranir and the provisional amounts of the assets acquired and liabilities assumed (in millions):
| Ranir | |||
| Purchase price paid | $ | 759.2 | |
| Assets acquired: | |||
| Cash and cash equivalents | $ | 11.5 | |
| Accounts receivable | 40.6 | ||
| Inventories | 59.0 | ||
| Prepaid expenses and other current assets | 4.0 | ||
| Property, plant and equipment, net | 40.8 | ||
| Operating lease assets | 3.7 | ||
| Goodwill | 291.1 | ||
| Definite-lived intangibles: | |||
| Developed product technology, formulations, and product rights | $ | 48.6 | |
| Customer relationships and distribution networks | 260.0 | ||
| Trademarks, trade names, and brands | 41.0 | ||
| Indefinite-lived intangibles: | |||
| In-process research and development | 39.7 | ||
| Total intangible assets | $ | 389.3 | |
| Other non-current assets | 2.7 | ||
| Total assets | $ | 842.7 | |
| Liabilities assumed: | |||
| Accounts payable | $ | 17.6 | |
| Other accrued liabilities | 7.7 | ||
| Payroll and related taxes | 5.5 | ||
| Accrued customer programs | 5.7 | ||
| Deferred income taxes | 44.2 | ||
| Other non-current liabilities | 2.8 | ||
| Total liabilities | $ | 83.5 | |
| Net assets acquired | $ | 759.2 | |
The goodwill of $291.1 million arising from the acquisition consists largely of the anticipated growth from new product sales, sales to new customers, the assembled workforce, and the synergies expected from combining the operations of Perrigo and Ranir. Preliminarily, goodwill of $223.0 million and $68.1 million was allocated to our CSCA and CSCI segments, respectively. We are currently evaluating the tax deductibility of the provisional goodwill. We expect some portion to be deductible for income tax purposes. The definite-lived intangible assets acquired consisted of trademarks and trade names, developed product technologies, and marketedcustomer relationships. Trademarks and trade names were assigned useful lives that ranged from 20 to 25-years. Developed product technologies were assigned 10-year useful lives and customer relationships were assigned 24-year useful lives. Customer relationships were valued using the multi-period excess earnings method. Trademarks and trade names, developed technology, and in-process research and development were valued using the relief from royalty method. Significant judgment was applied in collaborationestimating the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the timing and amounts of cash flow projections, including revenue growth rates, projected profit margins, and discount rates.
During the three months ended December 31, 2019, we recorded measurement period adjustments to the valuation of identifiable intangible assets of $46.6 million, deferred tax liabilities of $11.6 million and miscellaneous asset adjustments of $1.3 million. Therefore, goodwill, which was previously reported at acquisition date of $327.4 million, was adjusted to $291.1 million.
Perrigo Company plc - Item 8
Note 3
Pro Forma Impact of Ranir Acquisition
The following table presents unaudited pro forma information as if the Ranir acquisition had occurred on January 1, 2018 and had been combined with the results reported in our Consolidated Statements of Operations for all periods presented (in millions):
| Year Ended | |||||||
| (Unaudited) | December 31, 2019 | December 31, 2018 | |||||
| Net sales | $ | 4,975.6 | $ | 5,018.9 | |||
| Net income | $ | 159.3 | $ | 96.8 | |||
The unaudited pro forma information is presented for information purposes only and is not indicative of the results that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma information presented above includes adjustments primarily for amortization charges for acquired intangible assets, depreciation adjustments for property, plant and equipment that have been revalued, adjustments for certain acquisition-related charges, and related tax effects.
Generic Product Acquisition
On May 17, 2019, we purchased the ANDA for a generic product used to relieve pain, for $15.7 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 and begin amortizing it over a 20-year useful life. Operating results attributable to the product are included within our RX segment.
Budesonide Nasal Spray and Triamcinolone Nasal Spray
On April 1, 2019, we purchased product ANDAs and other records and registrations of Budesonide Nasal Spray, a generic equivalent of Rhinocort Allergy®, and Triamcinolone Nasal Spray, a generic equivalent of Nasacort Allergy®, from Barr Laboratories, Inc. ("Barr"), a subsidiary of Teva Pharmaceuticals, for $62.0$14.0 million in cash. In September 2007, we entered into an initialWe previously developed and marketed the products in collaboration with Barr under a development, marketing and commercialization agreement with Barr,that originated in which Barr contributed to the product's development costs and we developed and marketed the product in the U.S. and Israel.August 2003. Under this prior agreement, we paid Barr a percentage of net income from products sold by Perrigo in the product's sales in these territories, adjusted for Barr's contributions to the product's development costs.U.S. By purchasing the remaining product rightsassets from Barr and terminating the original development, marketing and commercialization agreement, we are now entitled to 100% of the income from sales of the product. Operating results attributable to these products are included within our CSCA segment. The intangible assets acquired are classified as developed product technology with a 10-year useful life.
Acquisitions During the Year Ended December 31, 2018
Generic Benzaclin™Product Acquisition
On August 24, 2018, we purchased the ANDA for a generic topical cream for $30.4 million in cash, which we capitalized as a developed product technology intangible asset. We launched this product during the three months ended December 31, 2018 and began amortizing the developed product technology over a 20-year useful life. Operating results attributable to the product are included within our RX segment. The intangibleSubsequently, during the year ended December 31, 2019, we identified impairment indicators related to changes in pricing and competition in the market, which lowered the projected cash flows that we expect to generate from the asset. We determined the asset acquired iswas impaired (refer to Note 4 and Note 7).
Nasonex-branded Products
On May 29, 2018, we entered into a distribution and license agreement with a nine-year useful life.
Perrigo Company plc - Item 8
Note 3
expense in our specialty "prescription only" ("Rx") portfolio, we exercisedCSCA segment because the option for both products, whichintangible research and development asset acquired has no alternative use. The agreement requires us to make contingent payments if we obtain regulatory approval and achieve certain sales milestones. We will also be obligated to make certain royalty payments on potential future sales. The contingent consideration will be included in the measurement of the cost of the asset when the contingency is resolved and the consideration is paid or becomes payable. Consideration paid after U.S. Food and Drug Administration ("FDA") approval will be capitalized and amortized to cost of goods sold over periods ranging from seven to ten years from the launcheconomic life of each product.
| Tretinoin Products | Development-Stage Rx Products | All Other(1) | |||||||||
| Purchase price paid | $ | 416.4 | $ | — | $ | 17.1 | |||||
| Contingent consideration | — | 24.9 | 26.2 | ||||||||
| Total purchase consideration | $ | 416.4 | $ | 24.9 | $ | 43.3 | |||||
| Assets acquired: | |||||||||||
| Cash and cash equivalents | $ | — | $ | — | $ | 3.8 | |||||
| Accounts receivable | — | — | 4.9 | ||||||||
| Inventories | 1.4 | — | 7.1 | ||||||||
| Prepaid expenses and other current assets | — | — | 0.1 | ||||||||
| Property, plant and equipment, net | — | — | 1.2 | ||||||||
| Goodwill | 1.7 | — | — | ||||||||
Definite-lived intangibles: | |||||||||||
| Distribution and license agreements, supply agreements | $ | — | $ | — | $ | 1.8 | |||||
| Developed product technology, formulations, and product rights | 411.0 | — | 18.0 | ||||||||
| Customer relationships and distribution networks | — | — | 8.2 | ||||||||
| Non-compete agreements | 2.3 | — | — | ||||||||
Indefinite-lived intangibles: | |||||||||||
| In-process research and development | $ | — | $ | 24.9 | $ | 4.9 | |||||
| Total intangible assets | $ | 413.3 | $ | 24.9 | $ | 32.9 | |||||
| Total assets | $ | 416.4 | $ | 24.9 | $ | 50.0 | |||||
| Liabilities assumed: | |||||||||||
| Accounts payable | $ | — | $ | — | $ | 2.8 | |||||
| Accrued liabilities | — | — | 0.1 | ||||||||
| Long-term debt | — | — | 3.3 | ||||||||
| Net deferred income tax liabilities | — | — | 0.5 | ||||||||
| Total liabilities | $ | — | $ | — | $ | 6.7 | |||||
| Net assets acquired | $ | 416.4 | $ | 24.9 | $ | 43.3 | |||||
Entocort® | Naturwohl | ScarAway® | GSK Products | All Other(1) | |||||||||||||||
| Purchase price paid | $ | 380.2 | $ | 150.4 | $ | 26.7 | $ | 223.6 | $ | 15.3 | |||||||||
| Contingent consideration | — | — | — | — | 13.9 | ||||||||||||||
| Total purchase consideration | $ | 380.2 | $ | 150.4 | $ | 26.7 | $ | 223.6 | $ | 29.2 | |||||||||
| Assets acquired: | |||||||||||||||||||
| Cash and cash equivalents | $ | — | $ | 4.6 | $ | — | $ | — | $ | — | |||||||||
| Accounts receivable | — | 3.3 | — | — | — | ||||||||||||||
| Inventories | 0.2 | 1.5 | 1.0 | — | — | ||||||||||||||
| Goodwill | — | 61.0 | 3.5 | 32.6 | — | ||||||||||||||
Definite-lived intangibles: | |||||||||||||||||||
| Distribution and license agreements, supply agreements | $ | — | $ | 21.4 | $ | — | $ | — | $ | — | |||||||||
| Developed product technology, formulations, and product rights | 380.0 | — | 0.5 | — | — | ||||||||||||||
| Customer relationships and distribution networks | — | 25.9 | 9.8 | 61.5 | — | ||||||||||||||
| Trademarks, trade names, and brands | — | 64.2 | 11.4 | 129.5 | — | ||||||||||||||
| Non-compete agreements | — | 0.3 | 0.5 | — | — | ||||||||||||||
Indefinite-lived intangibles: | |||||||||||||||||||
| In-process research and development | $ | — | $ | — | $ | — | $ | — | $ | 29.2 | |||||||||
| Total intangible assets | $ | 380.0 | $ | 111.8 | $ | 22.2 | $ | 191.0 | $ | 29.2 | |||||||||
| Total assets | $ | 380.2 | $ | 182.2 | $ | 26.7 | $ | 223.6 | $ | 29.2 | |||||||||
| Liabilities assumed: | |||||||||||||||||||
| Accounts payable | $ | — | $ | 2.8 | $ | — | $ | — | $ | — | |||||||||
| Accrued liabilities | — | 1.6 | — | — | — | ||||||||||||||
| Net deferred income tax liabilities | — | 27.4 | — | — | — | ||||||||||||||
| Total liabilities | $ | — | $ | 31.8 | $ | — | $ | — | $ | — | |||||||||
| Net assets acquired | $ | 380.2 | $ | 150.4 | $ | 26.7 | $ | 223.6 | $ | 29.2 | |||||||||
| Perrigo ordinary shares issued | 5.4 | |||
| Perrigo per share price at transaction close on March 30, 2015 | $ | 167.64 | ||
| Total value of Perrigo ordinary shares issued | $ | 904.9 | ||
| Cash consideration | 2,078.3 | |||
| Total consideration | $ | 2,983.2 | ||
| Year Ended | |||
| Line item | June 27, 2015 | ||
| Administration | $ | 29.7 | |
| Interest expense, net | 23.7 | ||
| Other expense, net | 324.0 | ||
| Loss on extinguishment of debt | 9.6 | ||
| Total acquisition-related costs | $ | 387.0 | |
| June 27, 2015 | Measurement Period Adjustments | December 31, 2015 | |||||||||
| Accounts receivable | $ | 227.4 | $ | (4.5 | ) | $ | 222.9 | ||||
| Inventories | $ | 288.9 | $ | (11.9 | ) | $ | 277.0 | ||||
| Property, plant and equipment, net | $ | 121.2 | $ | 9.6 | $ | 130.8 | |||||
| Goodwill | $ | 1,269.6 | $ | 419.1 | $ | 1,688.7 | |||||
| Intangible assets: | |||||||||||
| Developed product technology, formulations, and product rights | $ | 36.9 | $ | (5.5 | ) | $ | 31.4 | ||||
| Customer relationships and distribution networks | 1,342.7 | (286.4 | ) | 1,056.3 | |||||||
| Definite-lived trademarks, trade names, and brands | 282.0 | 5.5 | 287.5 | ||||||||
| Indefinite-lived trademarks, trade names, and brands | 2,145.2 | (141.4 | ) | 2,003.8 | |||||||
| Total intangible assets | $ | 3,806.8 | $ | (427.8 | ) | $ | 3,379.0 | ||||
| Accrued liabilities | $ | 50.0 | $ | (0.7 | ) | $ | 49.3 | ||||
| Net deferred income tax liabilities | $ | 771.1 | $ | 14.4 | $ | 785.5 | |||||
| Other non-current liabilities | $ | 88.9 | $ | (29.0 | ) | $ | 59.9 | ||||
| Gelcaps | Omega | Lumara | |||||||||
| Total purchase consideration | $ | 37.9 | $ | 2,983.2 | $ | 83.0 | |||||
| Assets acquired: | |||||||||||
| Cash and cash equivalents | $ | 4.6 | $ | 14.7 | $ | — | |||||
| Accounts receivable | 7.3 | 222.9 | 2.9 | ||||||||
| Inventories | 7.2 | 277.0 | 1.5 | ||||||||
| Prepaid expenses and other current assets | 2.1 | 51.2 | 0.4 | ||||||||
| Property, plant and equipment, net | 6.0 | 130.8 | 0.1 | ||||||||
| Goodwill | 6.0 | 1,688.7 | — | ||||||||
Definite-lived intangibles: | |||||||||||
| Developed product technology, formulations, and product rights | $ | — | $ | 31.4 | $ | 82.0 | |||||
| Customer relationships and distribution networks | 6.6 | 1,056.3 | — | ||||||||
| Trademarks, trade names, and brands | — | 287.5 | — | ||||||||
Indefinite-lived intangibles: | |||||||||||
| Trademarks, trade names, and brands | 4.4 | 2,003.8 | — | ||||||||
| Total intangible assets | $ | 11.0 | $ | 3,379.0 | $ | 82.0 | |||||
| Other non-current assets | 0.4 | 2.4 | — | ||||||||
| Total assets | $ | 44.6 | $ | 5,766.7 | $ | 86.9 | |||||
| Liabilities assumed: | |||||||||||
| Accounts payable | $ | 3.3 | $ | 225.0 | $ | — | |||||
| Short-term debt | — | 112.6 | — | ||||||||
| Accrued liabilities | 1.6 | 49.3 | 3.9 | ||||||||
| Payroll and related taxes | — | 51.3 | — | ||||||||
| Accrued customer programs | — | 28.9 | — | ||||||||
| Long-term debt | — | 1,471.0 | — | ||||||||
| Net deferred income tax liabilities | 1.4 | 785.5 | — | ||||||||
| Other non-current liabilities | 0.4 | 59.9 | — | ||||||||
| Total liabilities | $ | 6.7 | $ | 2,783.5 | $ | 3.9 | |||||
| Net assets acquired | $ | 37.9 | $ | 2,983.2 | $ | 83.0 | |||||
| Year Ended | Six Months Ended | Year Ended | |||||||||
| (Unaudited) | December 31, 2016 | December 31, 2015 | June 27, 2015 | ||||||||
| Net sales | $ | 5,288.6 | $ | 2,748.8 | $ | 5,682.5 | |||||
| Net income (loss) | $ | (4,011.0 | ) | $ | 81.0 | $ | 250.2 | ||||
Divestitures Completed During the Year Ended December 31, 2017
On January 3, 2017, we sold certain ANDAs for $15.0 million to a third party for $15.0 million, which was recorded as a gain in Other operating incomeexpense (income) on the Consolidated Statements of Operations in our RX segment.
On April 6, 2017, we completed the sale of our India APIActive Pharmaceuticals Ingredient ("API") business to Strides Shasun Limited. We received $22.2 million ofin proceeds, inclusive of an estimated working capital adjustment, which resulted in an immaterial gain recorded in our former Other segment. Prior to closing the sale, we determined that the carrying value of the India API business exceeded its fair value less the cost to sell, resulting in an impairment charge of $35.3 million which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016.
On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC.LLC and Alvogen CEE Kft. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resultedresulting in an immaterial gain recorded in our CHCICSCI segment. Prior to closing the sale, we determined that the carrying value of the Russian business exceeded its fair value less the cost to sell, resulting in an impairment charge of $3.7 million which was recorded in Impairment charges on the Consolidated Statements of Operations for the three monthsyear ended July 1,December 31, 2017.
On November 21, 2017, we completed the sale of our Israel API business, which was previously classified as held-for-sale, to SK Capital for a sale price of $110.0 million, which resultedresulting in an immaterial gain recorded in our former Other segment in Other (income) expense, (Income), net on the Consolidated Statements of Operations.
As a result of the sale, we recognized a guarantee liability (refer to Note 67). Per the agreement, we will be reimbursed for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. We are no longer the primary obligor on the liabilities transferred to SK Capital on November 21, 2017, however, we have provided a guarantee on certain obligations. As of December 31, 2019, the remaining guarantee for these obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9is $12.0 million.
On December 20, 2017, we completed the sale of one1 of the Development-Stage Rx Products to an ophthalmic pharmaceutical company. We will potentially receive the following consideration: (1) a milestone payment of $1.5 million after the buyer achieves net sales of $25.0 million in any given calendar year; (2) a milestone payment of $5.0 million after the buyer achieves $50.0 million in net sales in any given year; and (3) royalty payments of 2.5% of all net sales of the product from the date of the first commercial sales of the product and continuing until market entry of a generic equivalent of the product.
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
During the year ended December 31, 2016.2019, we early adopted ASU No. 2017-04 which removed the Step 2 requirement in instances when the carrying value of a reporting unit exceeds its fair value. Prospectively, if a reporting unit’s carrying value exceeds its fair value, we will record an impairment charge in the amount of the difference, limited to the amount of goodwill attributed to that reporting unit.
Perrigo Company plc - Item 8
Note 34
Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
| CSCA | CSCI(1) | RX(2) | Total | ||||||||||||
| Balance at December 31, 2017 | $ | 1,847.4 | $ | 1,205.7 | $ | 1,122.3 | $ | 4,175.4 | |||||||
| Impairments | (136.7 | ) | — | — | (136.7 | ) | |||||||||
| Currency translation adjustments | 3.0 | (54.4 | ) | (7.5 | ) | (58.9 | ) | ||||||||
| Balance at December 31, 2018 | 1,713.7 | 1,151.3 | 1,114.8 | 3,979.8 | |||||||||||
| Business divestitures | (42.2 | ) | — | — | (42.2 | ) | |||||||||
| Business acquisitions | 223.0 | 68.1 | — | 291.1 | |||||||||||
| Impairments | — | — | (109.2 | ) | (109.2 | ) | |||||||||
| Currency translation adjustments | 4.6 | (15.7 | ) | 8.3 | (2.8 | ) | |||||||||
| Balance at December 31, 2019 | $ | 1,899.1 | $ | 1,203.7 | $ | 1,013.9 | $ | 4,116.7 | |||||||
| CHCA | CHCI | RX | Specialty Sciences | Other | Total | ||||||||||||||||||
| Balance at June 27, 2015 | $ | 1,817.2 | $ | 1,530.2 | $ | 1,086.0 | $ | 199.6 | $ | 88.2 | $ | 4,721.2 | |||||||||||
| Business acquisitions | 9.7 | 87.4 | — | — | — | 97.1 | |||||||||||||||||
| Changes in assets held-for-sale | (13.0 | ) | — | — | — | (14.6 | ) | (27.6 | ) | ||||||||||||||
| Currency translation adjustments | (0.8 | ) | (53.3 | ) | (1.9 | ) | — | (2.1 | ) | (58.1 | ) | ||||||||||||
| Purchase accounting adjustments | 1.2 | 418.9 | — | — | — | 420.1 | |||||||||||||||||
| Balance at December 31, 2015 | 1,814.3 | 1,983.2 | 1,084.1 | 199.6 | 71.5 | 5,152.7 | |||||||||||||||||
| Business acquisitions | — | — | 1.7 | — | — | 1.7 | |||||||||||||||||
| Changes in assets held-for-sale | 4.5 | — | — | — | 9.0 | 13.5 | |||||||||||||||||
| Impairments | (24.5 | ) | (868.4 | ) | — | (199.6 | ) | — | (1,092.5 | ) | |||||||||||||
| Currency translation adjustments | (0.9 | ) | (27.5 | ) | 0.8 | — | 0.9 | (26.7 | ) | ||||||||||||||
| Purchase accounting adjustments | 17.2 | (16.5 | ) | — | — | — | 0.7 | ||||||||||||||||
| Balance at December 31, 2016 | 1,810.6 | 1,070.8 | 1,086.6 | — | 81.4 | 4,049.4 | |||||||||||||||||
Re-allocation of goodwill(1) | 35.3 | — | 27.7 | — | (63.0 | ) | — | ||||||||||||||||
| Business divestitures | — | (4.1 | ) | — | — | (26.4 | ) | (30.5 | ) | ||||||||||||||
| Currency translation adjustments | 1.5 | 139.0 | 8.0 | — | 8.0 | 156.5 | |||||||||||||||||
| Balance at December 31, 2017 | $ | 1,847.4 | $ | 1,205.7 | $ | 1,122.3 | $ | — | $ | — | $ | 4,175.4 | |||||||||||
(1) Certain cash flow associated with the API business were retained. We performed a relative fair value allocationhad accumulated impairments of the business retained and allocated it among the two segments where the business was allocated.
(2) We had accumulated impairments of $109.2 million as of December 31, 2019.
| Reporting Unit | Goodwill Remaining in Reporting Unit | Segment | Fair Value in excess of Carrying Value | |||||
| BCH | $ | 1,026.0 | CHCI | 6.6% | ||||
| Animal Health | $ | 178.9 | CHCA | 23.6% | ||||
| UK AUS | $ | 53.1 | CHCI | 18.3% | ||||
RX U.S. Reporting Unit Goodwill
During the end of the fourth quarter of 2017, the Animal Healththree months ended June 29, 2019, our RX U.S. reporting unit had an indication of potential impairment resulting fromwhich was driven by a combination of industry and market factors and uncertainty related to the terminationtiming and associated cash flows of a supply agreement.the projected albuterol sulfate inhalation aerosol (generic equivalent to ProAir® HFA). We prepared an impairment test as of December 31, 2017June 29, 2019 and determined that the fair value of the Animal HealthRX U.S. reporting unit continued to exceed net book value by 8.9%approximately 10%. The 8.9% marginexcess was lower than the excessour annual impairment test as of September 30, 2018, in which fair value overexceeded carrying value of 23.6% that was estimated as of October 1, 2017. Therefore, while noby more than 25%. While 0 impairment was recorded in 2017, the supply agreement termination increased the riskas of future impairment in this reporting unit.
In conjunction with historical trends, and advertising and promotion investments largely consistent with the reporting unit's growth plans. If a reporting unit does not pass step one of the goodwillour annual impairment test, step two is completed. The second step of the goodwill impairment test requires that we determine the implied fair value of the reporting unit’s goodwill, which involves determining the value of the reporting unit’s individual assets and liabilities. If the reporting unit’s carrying value exceeds its book value, an impairment charge is recorded.
Other Reporting Unit Goodwill
During our annual goodwill testing as of September 29, 2019, we determined the fair value of the CSC UK and Australia reporting unit was less than 20% higher than its net book value, and the Branded Consumer Self-care ("BCS") reporting unit was less than 10% higher than its net book value. Both reporting units are included in the CSCI segment. The fair value of the Oral Care International reporting unit, also in the CSCI segment, was less than 10% higher than its net book value, which is due to the relatedrecent application of fair value acquisition accounting to the reporting unit’s net assets rather than the presence of impairment indicators. The fair value of the remaining reporting units, CSCA and RX UK, exceed their net book value we recorded $130.5 million in impairment charges on the Consolidated Statement of Operations within our CHCI segment.by greater than 20%.
Animal Health Goodwill
During the three months ended October 1, 2016, we identified additional indicators of goodwill impairment in both our BCH-ROW and our Branded Consumer Healthcare - Belgium ("BCH-Belgium") reporting units. With respect to both reporting units,September 29, 2018, the primary impairment indicators included an additional decline in our 2016 performance expectations for the remainder of the year and a reduction in our long-range revenue growth and margin forecasts due to the factors outlined below. Neither the BCH-ROW nor the BCH-Belgium reporting units passed step one of goodwill impairment testing.
Perrigo Company plc - Item 8
Intangible Assets
| Year Ended | |||||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||
| Gross | Accumulated Amortization | Gross | Accumulated Amortization | ||||||||||||
| Indefinite-lived intangibles: | |||||||||||||||
| Trademarks, trade names, and brands | $ | 18.8 | $ | — | $ | 18.1 | $ | — | |||||||
| In-process research and development | 50.0 | — | 31.2 | — | |||||||||||
| Total indefinite-lived intangibles | $ | 68.8 | $ | — | $ | 49.3 | $ | — | |||||||
| Definite-lived intangibles: | |||||||||||||||
| Distribution and license agreements and supply agreements | $ | 126.7 | $ | 81.1 | $ | 178.6 | $ | 99.0 | |||||||
| Developed product technology, formulations, and product rights | 1,392.8 | 755.3 | 1,318.8 | 654.6 | |||||||||||
| Customer relationships and distribution networks | 1,805.6 | 671.4 | 1,586.6 | 566.5 | |||||||||||
| Trademarks, trade names, and brands | 1,353.5 | 250.1 | 1,282.4 | 188.5 | |||||||||||
| Non-compete agreements | 6.5 | 6.0 | 12.9 | 11.8 | |||||||||||
| Total definite-lived intangibles | $ | 4,685.1 | $ | 1,763.9 | $ | 4,379.3 | $ | 1,520.4 | |||||||
| Total intangible assets | $ | 4,753.9 | $ | 1,763.9 | $ | 4,428.6 | $ | 1,520.4 | |||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| Gross | Accumulated Amortization | Gross | Accumulated Amortization | Gross | Accumulated Amortization | ||||||||||||||||||
Definite-lived intangibles: | |||||||||||||||||||||||
| Distribution and license agreements, supply agreements | $ | 311.2 | $ | 169.8 | $ | 305.6 | $ | 120.4 | $ | 242.4 | $ | 77.7 | |||||||||||
| Developed product technology, formulations, and product rights | 1,358.4 | 598.7 | 1,418.1 | 526.0 | 1,387.6 | 426.0 | |||||||||||||||||
| Customer relationships and distribution networks | 1,642.0 | 460.6 | 1,489.9 | 307.5 | 1,520.7 | 193.0 | |||||||||||||||||
| Trademarks, trade names, and brands | 1,335.4 | 129.5 | 1,189.3 | 55.3 | 539.4 | 22.8 | |||||||||||||||||
| Non-compete agreements | 14.7 | 12.6 | 14.3 | 11.2 | 15.2 | 12.7 | |||||||||||||||||
| Total definite-lived intangibles | $ | 4,661.7 | $ | 1,371.2 | $ | 4,417.2 | $ | 1,020.4 | $ | 3,705.3 | $ | 732.2 | |||||||||||
Indefinite-lived intangibles: | |||||||||||||||||||||||
| Trademarks, trade names, and brands | $ | 52.1 | $ | — | $ | 50.5 | $ | — | $ | 1,868.1 | $ | — | |||||||||||
| In-process research and development | 38.2 | — | 64.0 | — | 48.2 | — | |||||||||||||||||
| Total indefinite-lived intangibles | $ | 90.3 | $ | — | $ | 114.5 | $ | — | $ | 1,916.3 | $ | — | |||||||||||
| Total other intangible assets | $ | 4,752.0 | $ | 1,371.2 | $ | 4,531.7 | $ | 1,020.4 | $ | 5,621.6 | $ | 732.2 | |||||||||||
Certain intangible assets are denominated in currencies other than the U.S. dollars;dollar; therefore, their gross and net carrying values are subject to foreign currency movements.
| Year Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| Definite-Lived Intangible Assets | IPR&D | Indefinite-Lived Intangible Assets | Definite-Lived Intangible Assets | IPR&D | Indefinite-Lived Intangible Assets | ||||||||||||||||||
| CHCA | $ | — | $ | — | $ | 0.4 | $ | — | $ | — | $ | — | |||||||||||
| CHCI | — | 1.1 | 849.1 | 321.4 | 3.5 | 185.1 | |||||||||||||||||
| RX | 19.7 | 11.6 | — | 342.2 | — | — | |||||||||||||||||
| Other | — | — | — | 2.0 | — | — | |||||||||||||||||
| $ | 19.7 | $ | 12.7 | $ | 849.5 | $ | 665.6 | $ | 3.5 | $ | 185.1 | ||||||||||||
The remaining weighted-average useful life for our amortizable intangible assets by asset class at December 31, 20172019 was as follows:
| Amortizable Intangible Asset Category | Remaining Weighted-Average Useful Life (Years) | |
| Distribution and license agreements and supply agreements | 7 | |
| Developed product technology, formulations, and product rights | ||
| Customer relationships and distribution networks | 17 | |
| Trademarks, trade names, and brands | ||
| Non-compete agreements | ||
We recorded amortization expense of $349.6$305.5 million, $356.8$333.6 million, $128.6 million, $174.5and $349.6 million during the years ended December 31, 20172019, December 31, 2018, and December 31, 2016, the six months ended December 31, 2015, and the year ended June 27, 2015,2017, respectively. The amortization expense in the year ended December 31, 2017 remained relatively flat. The increase in amortization expense in the year ended December 31, 2016 was due primarily to the incremental amortization expense incurred on the definite-lived intangible assets acquired from the Omega, Entocort®,and Tretinoin Products acquisitions. In addition, we incurred additional amortization in 2016 due to the previously indefinite-lived Omega brands changing classification to definite-lived during the year. The increase in amortization expense in the six months ended December 31, 2015 was due primarily to definite-lived assets
| Year | Amount | |||
| 2020 | $ | 284.4 | ||
| 2021 | 255.5 | |||
| 2022 | 226.0 | |||
| 2023 | 211.9 | |||
| 2024 | 200.9 | |||
| Thereafter | 1,742.5 | |||
Perrigo Company plc - Item 8
Note 4
| Year | Amount | |||
| 2018 | $ | 341.0 | ||
| 2019 | 316.4 | |||
| 2020 | 280.8 | |||
| 2021 | 251.8 | |||
| 2022 | 222.0 | |||
| Thereafter | 1,878.5 | |||
Generic Product (equivalent to Benzaclin®)
During the year ended December 31, 2019, we identified impairment indicators on a definite-lived intangible asset related to our clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®) in our RX segment. Increases in competition caused price erosion that lowered our long-range revenue forecast, which indicated the asset was no longer recoverable and was impaired. We recorded an asset impairment of $21.2 million (refer to Note 7).
Licensed Pain Relief Products
During the year ended December 31, 2019, following commercial launch delays relating to certain pain relief products that we licensed from a third party, the licensor determined that it would not extend the license agreement upon expiration. As a result, we determined the asset was fully impaired and recorded an asset impairment of $9.7 million relating to this license, which we had reported as a definite-lived intangible asset in our CSCI segment (refer to Note 7).
Evamist Branded Product
During the year ended December 31, 2019, we identified impairment indicators related to our Evamist branded product, which is a definite-lived intangible asset in our RX segment. The indicators related to a decline in sales volume and a corresponding reduction in our long-range revenue forecast. We recorded an asset impairment of $10.8 million (refer to Note 7).
Generic Product
During the year ended December 31, 2019, we identified impairment indicators for a certain definite-lived asset related to changes in pricing and competition in the market, which lowered the projected cash flows we expect to generate from the asset. We recorded an asset impairment of $27.8 million in our RX segment (refer to Note 3 and Note 7).
In-process R&D ("IPR&D")
We recorded an impairment charge of $5.8 million, $8.7 million, and $12.7 million on certain IPR&D assets during the years ended December 31, 2019, December 31, 2018, and December 31, 2017, respectively, due to changes in the projected development and regulatory timelines for various projects.
Animal Health Intangible Assets
During the three months ended September 29, 2018, we performed a recoverability test of the definite-lived intangibles and determined a significant asset group was not recoverable and determined the fair value of the indefinite-lived intangible asset had fallen below its net book value. We recorded an impairment charge in the third quarter of 2018 in our CSCA segment comprised of a brand indefinite-lived intangible asset impairment charge of $27.7 million, a developed product technology and distribution agreement definite-lived intangible asset impairment of $41.6 million, a supply agreement definite-lived intangible asset impairment of $2.8 million, and a trade name and trademark definite-lived intangible asset impairment of $4.5 million (refer to Note 7).
As a result of the strategic decision to re-prioritize a brand within the indefinite-lived asset, we reassessed the useful life of the indefinite-lived intangible asset and reclassified a $5.4 million indefinite-lived intangible asset to a definite-lived asset within the CSCA segment as of September 29, 2018. Subsequently, during the three months ended September 28, 2019, we completed the sale of our animal health business to PetlQ (refer to Note 3).
Lumara
During the year ended December 31, 2017, we identified impairment indicators for our Lumara Health, Inc. ("Lumara") definite-lived intangible assets which related to the decline in our 2017 performance expectations and a reduction in our long-range revenue growth forecast. We determined the Lumara product assets were impaired by $18.5 million within our RX segment (refer to Note 7).
Perrigo Company plc - Item 8
Note 5
NOTE 45 - ACCOUNTS RECEIVABLE FACTORING
We have accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was $27.5 million, $50.7$10.0 million and $64.5$24.3 million at December 31, 2017, December 31, 20162019 and December 31, 2015,2018, respectively.
NOTE 56 - INVENTORIES
Major components of inventory were as follows (in millions):
| Year Ended | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| Finished goods | $ | 530.3 | $ | 444.9 | |||
| Work in process | 186.9 | 197.5 | |||||
| Raw materials | 250.1 | 235.6 | |||||
| Total inventories | $ | 967.3 | $ | 878.0 | |||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||
| Finished goods | $ | 454.3 | $ | 431.1 | $ | 537.2 | |||||
| Work in process | 152.8 | 165.7 | 151.6 | ||||||||
| Raw materials | 199.8 | 198.2 | 209.9 | ||||||||
| Total inventories | $ | 806.9 | $ | 795.0 | $ | 898.7 | |||||
NOTE 67 - FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
| Level 1: | Quoted prices for identical instruments in active markets. |
| Level 2: | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| Level 3: | Valuations derived from valuation techniques in which one or more significant inputs are not observable. |
The following tables summarizetable below summarizes the valuation of our financial instruments carried at fair value by the above pricing categories (in millions):
| Year Ended | ||||||||||||||||||||||||||||||||||||||
| Fair Value | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | December 31, 2017 | December 31, 2016 | December 31, 2015 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Measured at fair value on a recurring basis: | ||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Investment securities | Level 1 | $ | 17.0 | $ | 38.2 | $ | 14.9 | $ | 6.6 | $ | — | $ | — | $ | 9.4 | $ | — | $ | — | |||||||||||||||||||
| Foreign currency forward contracts | Level 2 | $ | 6.3 | $ | 3.8 | $ | 4.8 | — | 4.3 | — | — | 3.8 | — | |||||||||||||||||||||||||
| Cross-currency swap | — | 26.3 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Funds associated with Israeli severance liability | Level 2 | 16.3 | 15.9 | 17.2 | — | 14.6 | — | — | 13.0 | — | ||||||||||||||||||||||||||||
| Total level 2 assets | $ | 22.6 | $ | 19.7 | $ | 22.0 | ||||||||||||||||||||||||||||||||
| Royalty Pharma contingent milestone payments | Level 3 | $ | 134.5 | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Financial assets | Level 3 | — | 2,350.0 | 5,310.0 | ||||||||||||||||||||||||||||||||||
| Total level 3 assets | $ | 134.5 | $ | 2,350.0 | $ | 5,310.0 | ||||||||||||||||||||||||||||||||
| Royalty Pharma contingent milestone | — | — | 95.3 | — | — | 323.2 | ||||||||||||||||||||||||||||||||
| Total assets | $ | 6.6 | $ | 45.2 | $ | 95.3 | $ | 9.4 | $ | 16.8 | $ | 323.2 | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Interest rate swap agreements | Level 2 | $ | — | $ | — | $ | 0.3 | |||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Level 2 | 3.8 | 5.0 | 3.9 | $ | — | $ | 8.4 | $ | — | $ | — | $ | 9.2 | $ | — | ||||||||||||||||||||||
| Total level 2 liabilities | $ | 3.8 | $ | 5.0 | $ | 4.2 | ||||||||||||||||||||||||||||||||
| Contingent consideration | Level 3 | $ | 22.0 | $ | 69.9 | $ | 17.9 | |||||||||||||||||||||||||||||||
| Contingent consideration payments | — | — | 11.9 | — | — | 15.3 | ||||||||||||||||||||||||||||||||
| Total liabilities | $ | — | $ | 8.4 | $ | 11.9 | $ | — | $ | 9.2 | $ | 15.3 | ||||||||||||||||||||||||||
| Measured at fair value on a non-recurring basis: | ||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
Goodwill(1) | Level 3 | $ | — | $ | 1,148.4 | $ | — | $ | — | $ | — | $ | 1,013.1 | $ | — | $ | — | $ | 42.2 | |||||||||||||||||||
Indefinite-lived intangible assets(2) | Level 3 | — | 0.3 | 1,031.8 | — | — | — | — | — | 10.5 | ||||||||||||||||||||||||||||
Definite-lived intangible assets(3) | Level 3 | 11.5 | 758.0 | — | — | — | 23.3 | — | — | 22.4 | ||||||||||||||||||||||||||||
| Assets held for sale, net | Level 3 | — | 18.2 | 37.5 | ||||||||||||||||||||||||||||||||||
| Total level 3 assets | $ | 11.5 | $ | 1,924.9 | $ | 1,069.3 | ||||||||||||||||||||||||||||||||
| Total assets | $ | — | $ | — | $ | 1,036.4 | $ | — | $ | — | $ | 75.1 | ||||||||||||||||||||||||||